Chipotle Mexican Grill (NYSE:CMG) is scheduled to announce its earnings on July 18. The burrito chain has had a good quarter with shares of the company gaining more than 15% in the last three months. Some of the recent optimism has been fueled by the opening of the ShopHouse Kitchen in Los Angeles. Investors see ShopHouse as an attractive proposition with a potential for many more such restaurants within the U.S. in the next few years. However, in the upcoming results to be announced, there will hardly be any effect of ShopHouse. Therefore, it makes sense to talk about Chipotle’s traditional restaurants.
Investors will be keenly eyeing the same-stores sales. The figure was a tepid 1% in the previous quarter although the quarter had two less working days than the year before quarter. On an apples-to-apples basis, the figure stood at 3%. Some of the new menu additions such as the "Sofritas" and the Margarita cocktails could lift sales in the second quarter. Menu price increases might also benefit the comparable sales. Thus, we expect the same-store sales figure to show some improvement in the second quarter.
Comparable sales, or same-store sales, is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation.
Margins Face Downward Pressure
Margins have been under pressure recently mostly due to high cost of raw materials such as corn, chicken and beef. The cost of food, beverage and packaging (as a percentage of revenues) rose 80 basis points to 33% on a year-over-year basis in the previous quarter.
Chipotle’s management have previously made their intentions clear of raising the menu prices by the end of the summer. Thus, partial price hikes at some of the restaurants across the country could bring some relief. Drought conditions have generally kept the prices of commodities high, and the menu price increments might barely be able to offset the rising costs of raw materials. 
Other costs such as labor and occupancy costs should remain relatively flat in the absence of the historically fast same-store sales to leverage the fixed costs. Chipotle has often clocked comparable sales growths of >10% and therefore the revenue growth has outpaced the rate at which the fixed costs have grown. Overall, we feel that margins are likely to remain in a narrow range with a slight downward bias.
Chipotle’s expansion should also continue with the restaurant chain on course to add about 170-180 new stores in 2013. In the first quarter, it added 48 new restaurants. Chipotle has generally met its store guidance in the past, so we expect the company to meet its guidance this time around as well.
We have a price estimate of $348 for Chipotle Mexican Grill, which is about 10% lower than the current market price.
- U.S. Cattle Ranchers Endure More Drought, Rising Feed Prices, July 3, 2013, bloomberg.com
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