For its nearly 10 years as a public company, Chipotle Mexican Grill (NYSE:CMG) has consistently defied skeptics by delivering fantastic growth. After reporting blockbuster quarterly earnings Monday afternoon, it is clear that Chipotle's growth runway is far from over. Simply put, Chipotle is perfectly positioned to profit from changing consumer tastes. While consumers are still looking for value, they are increasingly looking for higher quality in their food, which has benefited the fast casual restaurants at the expense of fast food chains like McDonald's (NYSE:MCD). With healthy and fresh offerings, CMG has tapped into this trend and captured consumers' imaginations.
In the second quarter, CMG earned $3.50 on $1.05 billion in revenue while analysts were looking for $3.41 on $989 million in sales (all financial and operating data available here). As investors digested this massive beat, shares popped upwards of 10% in the after-hours session. Revenue growth was a stellar 28.6% while EPS jumped 24.1%. Restaurant operating margins decreased by 30bp to 27.3% due to higher food costs thanks to a drought and higher beef prices. Food costs as a percentage of revenue jumped 150bp. To counter some of the increase in food prices, Chipotle has selectively raised prices in some markets.
This has raised concerns that by defending gross margins, Chipotle could lose customers; after all, consumer budgets do remained constrained. However, it appears that higher prices did not keep customers away because they still see value in the Chipotle brand, which is as strong as ever. Same-store sales growth was an astounding 17.3%. This was an acceleration from the first quarter's 13.4% pace and far better than last year's 5.5%. Even with higher prices, Chipotle is welcoming more and more customers to its stores. At the same time, Chipotle continues to open new stores, which is why revenue growth outpaced same store sales growth. In the quarter, the company added 45 locations bringing its total count to 1,681.
Chipotle is a rare company with accelerating revenue growth. Typically as a company gets bigger, its sales growth slows down because the potential market is only so large. Even though Chipotle is adding locations, same store sales growth continues to increase at a faster pace. We have seen per store sales acceleration in each of the past four quarters. This growth has allowed management to increase its full year guidance. Chipotle now expects full year same-store sales growth to come in at "mid-teens" compared to previous guidance of "high-single digits." Not only did Chipotle deliver fantastic results, but it promised better than expected growth for the duration of the year.
As a consequence, I now expect full year 2014 revenue to come in at roughly $4.1 billion, which is up 27% year over year. This should translate to about $14 in EPS for the full year. In 2015, I expect the Chipotle brand to continue to deliver strong results as consumers increasingly move to fast casual. I expect the economy to remain in decent in 2015 with growth of 2% or more and continued job gains, which will allow some "late-movers" to trade up from fast food to fast casual. I expect same-store sales growth of about 10% while upstart brands ShopHouse and Pizzeria Locale could deliver some upside if Chipotle decides to expand their store growth. I expect revenue gains of about 20% to $4.9 billion, translating to earnings of about $17 (+/- $0.50).
It should also be noted that about 99% of Chipotle's revenue comes from the United States. Currently, there is no pressing need to expand overseas because CMG clearly has so much more growth left in the U.S. However as the U.S. market gets a bit closer to saturation, CMG has the ability to expand overseas to maintain a lightning fast pace of growth. I expect Chipotle to more forcefully consider an international presence by 2016, which could help it maintain revenue growth north of 15% through 2020.
While you may be a bull or bear on CMG stock, it is hard to be anything but positive on Chipotle's operating performance. Valuation is certainly getting stretched though. CMG was trading $650 after-hours, which is about 38x 2015 earnings. That translates to a PEG (price to earnings growth) of roughly 1.9x. While this is fairly high, it is better than many internet names like FireEye (NASDAQ:FEYE) or Twitter (NYSE:TWTR), many of whom are still running losses. When it comes to growth companies, Chipotle offers one of the more compelling valuations. With a growth runway of several years and the potential for international expansion, its valuation may be rich but it is not insane.
After this quarter, I believe the risk in Chipotle is still to the upside, especially if exasperated short sellers decide to cover and move on once and for all. I would remain long shares until $700 when its forward PEG ratio will pass 2x. At $700 I would trim a position and wait for a pullback as that is a very fair valuation. For now, investors should remain long this fantastic growth company that continues to execute better than anyone could have hoped.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.