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Shares of Chipotle Mexican Grill (NYSE:CMG) have had a steady start to the year, trading with gains of 25% so far in 2013. Shares rose sharply on the back of an acceleration of store openings, which spur revenue growth, thereby compensating for slower same-store sales growth.

As the stock has risen more than 50% from its lows back in October of last year, the recovery in the share price has outpaced the recovery in the fundamentals, making the stock increasingly more interesting to short.

First-Quarter Results

Chipotle Mexican Grill generated first-quarter revenues of $726.8 million, up 13.4% on the year before. Revenue growth was driven by store openings, as Chipotle opened 48 new restaurants bringing the total count to 1,458. Revenues came in slightly ahead of consensus estimates of $725 million.

Comparable restaurant sales rose by 1.0% as an increase in traffic more than outweighed a loss of trading days, which subtracted 200 basis points from growth rates.

Net income rose 22% from $62.7 million to $76.6 million, as diluted earnings per share rose 24% to $2.45 per diluted share. Chipotle used the correction in its share price last year to buy back some of its own shares. Earnings were furthermore favorably impacted by income tax credits, which added $0.10 per share to first-quarter earnings. Earnings came in ahead of consensus estimates of $2.15 per share, as food costs moderated over the past quarter.

CEO and founder Steve Ells commented on the developments in the quarter, "We are committed to sourcing the finest ingredients we can, and to skillfully preparing and cooking them with great care, because we know it results in exceptional tasting food that our customers appreciate."

Reading Through The Income Statement

Chipotle continues to experience some margin pressure as food, beverage and packaging costs increased by 80 basis points on the year to 33.0%. Still, total operating expenses fell by 50 basis points to 83.5% as the company actually cut general and administrative expenses. Those expenses fell by 160 basis points to just 6.1% of total revenues, partially driven by real cost cuts and partially driven by one-time charges in the comparable period a year ago.

As a result of lower income tax rates as mentioned above, net margins were up by 70 basis points to 10.5%.

Solid Full-Year Outlook

For the year of 2013, Chipotle continues to expect to open 165 to 180 new restaurants, although the number could come in at the high end of the range. Comparable restaurant sales are expected to come in flat to low single digits, which excludes the possibility of potential menu price increases later in the year.

Valuation

Chipotle ended its first quarter with $507.5 million in cash and equivalents. The company operates without the assumption of debt, for a solid net cash position.

For the fiscal year of 2012, Chipotle generated annual revenues of $2.73 billion, up 20% on the year before. Net income rose 29% to $278 million, or $8.75 per diluted share.

Trading around $373 per share on Monday May 6, the market values Chipotle around $11.5 billion. This values operating assets around $11.0 billion, or at 4.0 times 2012's annual revenues and 39-40 times annual earnings.

Chipotle does not pay a dividend at the moment.

Some Historical Perspective

Chipotle has been a long-term growth story as both customers and investors like the Mexican fast food chain, which offers high-quality meals. Shares rose from merely $45 per share in 2008 to peak at $440 in spring of last year.

Rising food costs and a rapid deceleration of same-store sales growth sent shares to lows of $240 in the autumn of the year. Shares have risen more than 50% from that point in time, currently exchanging hands at $373 per share.

Between 2009 and 2012, Chipotle has grown its revenues by a cumulative 80% to $2.73 billion over the past year. Net earnings rose by 119% to $278 million in the meantime.

The Mix Of Comparable Sales, Store Openings And Margins

As mentioned above, Chipotle traditionally relied on comparable store sales growth to grow its earnings, but this has shifted toward new store openings.

During the quarter, Chipotle opened 48 stores, up 50% compared to the first quarter of last year, but down from 60 openings in the final quarter of 2012. Comparable restaurant sales rose by merely 1.0%, which compares to growth rates of 12.7% in the first quarter of last year and 3.8% in the final quarter of 2012. The 1.0% same-store sales growth rate is artificially depressed due to fewer opening days. Adjusting for this, same-store sales grew at a solid 3.0% indicating that the deceleration in same-store sales growth rates is stabilizing.

While growing revenues by means of opening new restaurants is capital intensive, Chipotle continues to operate with a solid balance sheet. New restaurants being opened generate annual revenues of $1.5-$1.6 million, which is pretty decent as on average the company generates revenues of $2.1 million per restaurant. In comparison, at today's valuation, the market values each restaurant around $7.9 million.

Yet the market is relieved as the pace of store openings is solid, so is the performance of those stores. The 48 openings in the first quarter, implies another 107-112 openings for the remainder of the year, and Chipotle could deliver a beat on store openings. The company furthermore aims for three new ShopHouse restaurant openings in the coming weeks, as well as a very selective foreign expansion.

At the same time food costs are moderating as well, being up compared to the first quarter last year, but down sharply from the past fourth quarter. The company will contemplate price hikes of 3-5% in the second half of the year depending on current economic circumstances. As such, both food costs and same-store sales growth is moderating, while restaurant openings continue at a healthy pace, boding well for future earnings.

Investment Thesis

After a 50% run-up since October of last year, shares have become a bit too expensive again. After reporting the poor third-quarter results in October I closed out my short position.

Still I feel that guys like Einhorn who shorted shares at lower levels are too aggressive. After the recent run-up, which implies new premium valuations I might contemplate a renewed short position if the stock runs up towards $400 per shares.

The run-up in the stock seems to outpace the positive operational developments despite good new initiatives including new menu introductions and the offering of catering services as an increase in marketing expenses will impact the bottom line in the coming quarter.

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Source: Chipotle Mexican Grill: As Stock Recovery Outpaces Fundamental Improvements, A Short Thesis Becomes More Appealing Again