Chipotle Mexican Grill - New Restaurant Openings Are A Cause For Optimism

| About: Chipotle Mexican (CMG)

Shares of Chipotle Mexican Grill (CMG) have seen a bit of volatility since the start of the year. Shares started the year around the $300 mark and fell to lows of $275 later in January. From that point in time, shares have regained ground, currently exchanging hands at $317 per share after the company published its fourth-quarter results.

Fourth-Quarter Results

Chipotle reported its fourth-quarter results on the 5th of February. The company reported revenues of $699.2 million, up 17.2% on the year before. Revenue growth is driven by a 3.8% increase in comparable sales as well as 60 new store openings during the quarter.

So far the good news. Operating margins are expected to fall by 150 basis points to 24.6%. Margin pressure is the result of continued food inflation, notably in steak and barbacoa. Total food costs now make up 33.5% of sales, up 130 basis points on the year before.

Net income for the quarter came in at $61.4 million, up from $57.5 million in the final quarter of the year before. Earnings per share came in at $1.95 per share, in line with the previous guided $1.92-$1.97 per share.

Co-CEO and Chairman Steve Ells commented on the results, "During 2012, we remained focused on our mission to change the way people think about and eat fast food. We're rewriting the fast food rules, sourcing more and more sustainable raised ingredients and respecting farmers, the environment, animals, and ultimately our customers. Our food culture has always set us apart from other fast food restaurants by using great quality ingredients and preparing food using classic cooking techniques in open kitchens on display for all to see. People appreciate these things and we'll continue to stay focused on them."

A New Growth Market...

To drive growth into 2013 and beyond, Chipotle furthermore announced the launch of its catering services in Colorado. The catering services will be rolled out to all of its markets in the coming months.

Chairman and founder Steve Ells commented on the developments, "We are changing the way people think about and eat fast food by offering our customers better ingredients from more sustainable sources in a way that is affordable and accessible. With catering, we can now better serve our customers by allowing them to bring Chipotle into their homes, offices and school."

... Follows A Quicker Pace Of Store Openings

Besides seeing a moderate impact of food cost inflation in 2013, a major other positive surprise is the accelerated pace of store openings. Chipotle opened 60 stores during the fourth quarter, up from 36 openings in the third quarter of the year. At the presentation of the third quarter results, Chipotle had opened 123 store so far for the year.

At the time, the company expected to open 155-165 new stores, or possibly a few more. The quick pace of openings in the fourth quarter meant that Chipotle opened 183 new stores, far exceeding its own expectations.


Chipotle Mexican Grill ended its fourth quarter with $473 million in cash, equivalents and short-term investments. The company operates without the assumption of debt, for a comfortable net cash position.

For the full year of 2012, Chipotle generated annual revenues of $2.73 billion. The company net earned $278 million, or $8.75 per diluted share.

Valued around $317 per share, the market values Chipotle at roughly $9.8 billion. This values operating assets of the firm around $9.3 billion. Based on the full-year results, operating assets are valued at 3.4 times annual revenues and 33 times annual earnings.

Currently, Chipotle Mexican Grill does not pay a dividend.

Some Historical Perspective

Shares of Chipotle have seen quite some movement over the past year. At the start of 2012, shares steadily rose from $360 in January to highs over $440 during spring of 2012. Shares fell roughly $100 in a single trading day after a dramatic quarterly update, back in July of 2012. Shares hit lows around $235 in October after another poor quarterly update. Shares recovered roughly a third from that point in time, currently exchanging hands at $317 per share.

Don't feel too sorry for long-term investors in the stock, who are still doing well. Shares of the company rallied from $50 at the start of 2009, and investors who bought at the time, have still seen their investments multi-fold. Between 2008 and 2012, annual revenues more than doubled to $2.7 billion. Net income rose even faster over the period.

Investment Thesis

The earnings potential of Chipotle is eventually determined by the mix of profit margins, comparable store sales growth and the pace of new store openings.

Profit margins have come under severe pressure in recent quarters as food inflation continued and the company did not raise prices. Looking into 2013 the company expects less food inflation and sees the possibility for a possible price hike later this year.

Comparable sales growth continues to slow down, but seems to stabilize. Second-quarter same-store sales growth came in at 8.0% and fell to 4.8% in the third quarter of the year. Growth slowed down another 100 basis points to 3.8% in the final quarter of 2012.

While profit margins and comparable-store sales results are deteriorating, they appear to be stabilizing. The bright spot is the pace of new store openings, which will accelerate revenue and earnings growth. Chipotle opened 183 new stores in 2012, far exceeding its own and analysts' expectations.

Fourth-quarter earnings came in around $1.95 per share, up 7.7% compared to last year's earnings per share of $1.81. The fourth quarter is traditionally a bit slower for Chipotle, but disappointing is the 14.1% decline in quarterly earnings, which compares to a 4.7% decline in the fourth quarter of 2011.

Shares have risen approximately a quarter from their lows in October of 2012 after the presentation of the third-quarter results. Readers of previous articles note that I closed out a short position around the time. I am positively surprised with the accelerated pace of new store openings, as well as the growth in comparable-store sales, both of which exceeded Chipotle's own guidance. Disappointing are the operating margin developments, driven by food cost inflation, which could be mitigated in the coming year.

I closed my short thesis after the price declines of October. Shares have recovered roughly a third from that point in time, driven by promising new developments in the final quarter. I remain on the sidelines as I don't see a convincing case for either a short or a long position at this point in time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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Tagged: , Restaurants, Earnings
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