Times were equally rough for the restaurant industry as others following the financial contagion of 2008. People lost their jobs and panicked and preferred to spend the lesser they could to pay longer for the necessities. However, now as the economic growth has gradually started picking up pace and more jobs are being created, consumers are willing to part with their money to some extent. According to the National Restaurant Association "NRA", the restaurant industry sales are projected to reach a record high of $683.4 billion in the fiscal year 2014. Chipotle Mexican Grill, Inc. (NYSE:CMG), the Mexican cuisine restaurant, is one of the players in this industry and is likely to benefit from rebounding commercial foodservice market (see graph below).
Source: CHD Expert
Chipotle has recently announced its second quarter results for the fiscal year 2014. Let's take a look at how the company has performed in the midst of the improving macroeconomic environment and assess its future growth prospects.
Recent Performance At A Glance
Source: Chipotle SEC Filings 10-Q
To begin with, the high teen growth in the comparable restaurant sales and the favorable response to 45 new restaurant openings culminated into a staggering quarterly top line growth of 28.6%. The increase of 17.3% in comparable store sales was mainly achieved on the back of higher customer traffic while increase in average check per guest due to upward revision in menu prices contributed a small share as well.
Moving to the cost segment, food, beverage and packaging costs as a percentage of revenue had shot up to 34.6% during the most recent quarter compared to 33.1% for the corresponding period last year. The increase in cost mainly resulted from the price hike in its main ingredient items like beef due to shortages in supply, avocados, dairy etc. The company was able to pass on some of the inflationary impact to the end consumer in the form of higher menu prices charged. However, Chipotle cannot continue to adopt this behavior going forward as customers have showed some resistance to the increase in charges.
Labor costs trimmed down to 21.8% of sales in the second quarter of 2014 compared to 22.7% in the same period last year due to a larger increase in the average restaurant sales than the labor costs as more staff was hired and normal wage inflation.
The positive top line growth trickled down to the bottom line and resulted in an EPS growth of 25%. The company posted an EPS of $3.55 during the most recent quarter, up from $2.84 in the previous year.
Entering Into A New Business
The company has also stepped into the catering business which represented 1.6% of the total revenue during the period under discussion, up from 0.3% a year ago. This new business is likely to rake in higher revenues in the future as the company builds on its brand equity in this line of business.
Future Expansion Plans Quantified
The company has plans to open 180 to 195 restaurants during 2014. It has already opened 86 restaurants by the end of the second quarter and thus, 94 to 109 new restaurants are likely to open up in the future quarters. Revenue collected from a new restaurant highly depends on its location. Proven markets like high streets are likely to add positive financial results. The company intends to undertake 70% of the expansion in "proven markets", 15% in "developing or established markets" and the remaining in "new markets".
Staying conservative and assuming that the average restaurant sales of second quarter to continue with no further growth impact being inserted, the company's top line growth is anticipated to range in between $216.86 million to $251.46 million. Applying the net profit margin "ttm" of 9.83%, this translates into bottom line elevation of $21.3 million to $24.7 million. Based on the current outstanding shares of 31.02 million, the incremental effect of the new restaurant openings is calculated to be $0.69 to $0.80 on a per share basis. The growth brought in by the comparable store sales would be on top of this amount.
Based on the company's aggressive expansion plans, new business entry along with a positive future outlook of the restaurant industry, Chipotle is likely to continue its growth trajectory. However, the rising food costs due to shortage in beef supply may slightly pressurize margins. The company's future performance potential can also be confirmed from its valuation. Based on the sector's P/E "ttm" of 52.63x and consensus analyst EPS estimate of $13.66 for 2014, the stock's intrinsic value is calculated to be $732.59 which represents an upside potential of 8.33% to the current market price.
Although the company does not pay out dividends, the internal reinvestment is currently bearing more fruit for the investors as the company continues to report higher average restaurant sales, depicting an efficient deployment of resources.
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