Chipotle Poised For Well-Grilled Second-Quarter Earnings

| About: Chipotle Mexican (CMG)

By George Zack

Chipotle Mexican Grill, Inc. (NYSE:CMG), a highly successful fast casual restaurant chain, will report earnings for its second quarter of fiscal 2014 (2QFY14) after the market closes on Monday. Analysts expect the company to report earnings per share (EPS) of $3.09 and quarterly revenues of $989.7 million.

We believe that Chipotle will likely race ahead of the Street's expectations; Chipotle has beaten the Street's revenue expectations in each of the last four quarters, and EPS expectations in two of the prior four quarters.

Chipotle's Relatively Strong 1Q Performance

Although the company's first-quarter EPS of $2.64 was lower than the consensus estimate of $2.86, net income surged 8% year-over-year (YoY) to $83.1 million. First-quarter revenues of $904 million represented a 24% YoY increase, and were higher than the Street's expectations of $874 million. Comparable store sales (comps) increased 13.4% over 1QFY13, and galloped ahead of 4QFY13 comps of 9%. The company also raised its full-year comps growth forecast from a low single-digit percentage to a high single-digit percentage.

Harsh weather and rising food costs in the first quarter led Chipotle to raise its costs for the first time in three years. In spite of this, the company's comps and revenues continued to improve, while its competitors reported relatively poor comparable quarter performance on the back of bad weather and rising food costs.

While Panera Bread Co (NASDAQ:PNRA) beat the Street's estimates for its first-quarter EPS and revenues, its comps only rose by a mere 0.1% YoY, and it slashed its full-year EPS target because of the harsh weather. Noodles & Co (NASDAQ:NDLS), which also missed the Street's expectations for both EPS and revenues for the first quarter, witnessed a 1.6% YoY decline in comps.

Menu Innovations to Lead Second-Quarter Growth for Chipotle

Chipotle's secret recipe for success is its rapid menu innovations and emphasis on quality food ingredients.

Using mostly organics ingredients, naturally raised meats, and lower carbohydrates and higher protein servings, the company continues to generate mass appeal among health conscious consumers.

The company is also looking to expand units for two of its chains: south-east Asian concept restaurant ShopHouse, and pizza restaurant Pizzeria Locale. The latter competes with higher calorie offerings from YUM! Brands Inc.'s (NYSE:YUM) Pizza Hut. Additionally, the company's national rollout of its catering services should also help boost its topline performance.

While Chipotle said in the first-quarter conference that it expects food prices to rise throughout FY14, strong comps and guest traffic are still likely to boost topline performance, and to a major extent the company's bottom-line too.

Wunderlich Securities issued an updated price target of $560 for Chipotle on July 9, up from a previous target of $542, as it believes consumers have largely come to terms with higher prices following the rise in food costs. Wunderlich is expecting the company to report an 11% growth in comps for the second quarter, up from its previous forecast of 8%.

Chipotle closed 1.85% higher on Friday to $592.42. The stock has risen 11.3% year-to-date.

Disclosure: No positions