Chipotle Mexican Grill - Digging Into The Earnings Call

| About: Chipotle Mexican (CMG)

Chipotle Mexican Grill (NYSE:CMG) was up around 4.5% after hours since releasing fourth quarter results. Shares are currently down 1% following the call. The drop back down is driven by management stating that 2013 will be a difficult year for comparable restaurant sales- which are up 30% since 2009- and that menu prices will only be increased during the middle half of 2013.

Highlights for the fourth quarter of 2012 as compared to the fourth quarter of 2011

  • Revenue increased 17.2% to $699.2 million

  • Comparable restaurant sales increased 3.8%

  • Restaurant level operating margin was 24.6%, a decrease of 150 basis points

  • Net income was $61.4 million, an increase of 6.8%

  • Diluted earnings per share was $1.95, an increase of 7.7%

  • Opened 60 new restaurants

Highlights for the twelve months ended December 31, 2012 as compared to the prior year

  • Revenue increased 20.3% to $2.73 billion

  • Comparable restaurant sales increased 7.1%

  • Restaurant level operating margin was 27.1%, an increase of 110 basis points

  • Net income was $278.0 million, an increase of 29.3%

  • Diluted earnings per share was $8.75, an increase of 29.4%

  • Opened 183 new restaurants

Listening to the conference call we got some interesting information regarding how 2013 will play out.

Growth - New Locations, International Expansion and Shophouse

The "Portfolio Strategy" Chipotle has is to utilize proven markets to provide strong and reliable profits and growth which will be used to develop new markets.

Management made a distinction on the call between proven markets- mainly the U.S., and new markets- mainly Canada, London, and the ShopHouse brand. The interesting part was that for the first time, management stated that the Canadian market (especially Toronto) is closer to a proven market than a new market. In Toronto, restaurant margins are similar to those in the U.S., implying likely increased store openings during 2014 and 2015. They also stated that ShopHouse is getting closer to a proven market and it is starting to look reasonable that we will see ramping up of opening in the coming years.

London, on the other hand, is showing lower volumes when compared to restaurants in the States. Company-funded research shows customers in London liked the food as well as the dining experience. The same survey alerted that the problem in driving customers is stemming from extremely low brand awareness.

Overall management reiterates 165-180 new locations during 2013; I think they are giving a conservative estimate they plan to beat considering they opened 60 restaurants in Q4 2012.

New initiatives and Marketing

Chipotle is slightly altering its marketing strategy. Previously the company's main purpose in marketing was brand building. Currently Chipotle plans to concentrate marketing not only on brand building but also on transaction driving. Chipotle plans to increase marketing from 1.3% of sales to 1.7% and increase use of traditional marketing methods like billboards, commercials and radio especially in its 25 largest markets.

In the beginning of 2013, catering- which is now only available in Colorado- will be rolled out nationwide.

A new menu item that's being tested in the San Francisco Bay Area is Sofritas, a vegetarian option made from shredded organic tofu. Management plans to decide if to roll it out nationwide depending on progress in the testing locations.

New grills are being rolled out nationwide in 2013. Testing suggests these grills are a large improvement over the older ones, and the initial replacement investment will be paid back in 2-3 years due to the grills lower operational costs.

Food Inflation and Pricing

Food inflation has eroded margins across the board, food cost for 2012 was 33.5% and projected 2013 is 33.5-35%. Management prefers to be extra careful with price increases than to make a mistake and upset customers. From the conference call, I gathered they will likely wait until the second half of 2013 before instituting a price increase of 4% (0.25 on a burrito). I don't believe an increase of this size will have any meaningful impact on customer traffic, but it will improve margins in Q3 and Q4.

Balance Sheet and Buybacks

Even after buying back $229 million worth of shares in 2012 the company increased its cash position by $79 million or 15%.

Management has also been wise in its share buyback program this year. At the first half of the year, when Chipotle was trading over $400, only $29 million dollars worth of shares were bought. As the stock tanked, management saw an opportunity to increase shareholder value and accelerated purchases to $200 million dollars between July and the end of the year.

Chipotle will also benefit from a lower tax rate of 38.5% in 2013, compared to 39.3% in 2012.


My thesis regarding Chipotle has not changed since my previous articles covering the stock, I think at these price levels it is very hard to go wrong with an investment in Chipotle. As my previous article suggested, I see Chipotle as a great investment five to ten years down the line:

To me Chipotle today is McDonald's 60 years ago. If that is the case, it doesn't really matter if you buy Chipotle at $250, $300 or $400. I believe there is a real change happening in the fast serve industry and Chipotle is the only company that is in a position to capitalize.

Disclosure: I am long CMG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.