Chipotle Mexican Grill 1Q07 Review: Analyst Pessimism Unwarranted

Yesterday, Chipotle Mexican Grill (CMG) reported 1Q 2007 results (See the Press Release and
Conference Call).

Highlights

** Revenue up 26.2% to $236.1 million from $187.02 million in the 1Q 2006
** Comparable restaurant sales increased 8.3%
** Average individual restaurant sales $1,631,000
** Restaurant level operating margins up 50 basis points to 20.7% from 20.2% in 1Q 2006

** Net income up to $12.4 million ($0.38 per share) from $8 million ($0.26 per share) in 1Q 2006
** Profit margin 5.3%
** Diluted share count 32,953,000

** Cash flow from operating activities up to $30,747,000 from $23,194,000 in 1Q 2006
** Cash flow from investing activities -$32,670,000 from -$14,200,000 in 1Q 2006
** Cash flow from financing activities $7,183,000 from $124,409,000 in 1Q 2006 (the 1Q 2006 number is so much higher because of the one-time equity deal made last spring)

** 28 new restaurants were opened during the quarter, bringing total to 605
** Recently introduced naturally raised chicken in the Colorado market
** 2/3 of all the chicken Chipotle serves is naturally raised

Outlook

** Now expecting to open between 110-120 restaurants in 2007, previously were expecting 95-105 openings - to meet this goal approximately 27-31 restaurants will be opened per quarter for the next three quarters
** Expecting comparable restaurant sales increases in the mid to high single digits
** Expecting effective tax rate of 38%
** Stock compensation expense of approximately $8 million - $8.5 million
** Expecting diluted share count of 33.25 million

Wow. Talk about blowing away pretty much all estimates and expectations. Analysts were expecting an EPS of $0.32 on sales of $227.25 million. They even lowered their estimates after the 4Q. Chipotle has proved yet again that they are an extremely superior restaurant business. The restaurant industry overall has felt the pinch from cold and fierce weather and, as a result, analysts were expecting Chipotle's margins to drop quite a bit and have a poor quarter. What I find amazing is that Chipotle's profit margin actually increased during the quarter to 5.3% from 4.93% in the 4Q. This is also up significantly YOY from the 1Q 2006's 4.3%. This means that even with the pressure the overall restaurant industry was feeling, Chipotle was able to increase margins, open more restaurants than expected, see same-store sales increase at a very nice rate, and see the EPS increase 46.2%. This is a phenomenal release considering what the industry was up against and what analysts are expecting. This is the sixth quarter in a row in which Chipotle beats estimates. This is every quarter since going public, and every time they haven't just beaten estimates, they smash them. I believe analysts don't understand Chipotle's business and the true strength of the brand.

The business continues to fuel growth, and it's also good to see management investing more into CapEx; now is the time to do so. The most eye-catching piece of the release, to me, was the announcement that management is now planning to open 110-120 restaurants, 15 more than they were previously expecting. The company will easily be able to do this; the business is producing healthy cash flow and the balance sheet is very strong. Because of this move, we now know that management is very confident in the company's ability to produce cash over the next year, so I think we'll be seeing more strong quarters ahead.

Chief Finance and Development Officer Jack Hartung did mention in the release that management remains confident in growing the EPS at 25% annually for the long-term. This management team is doing a terrific job and I'm stunned that they were able to actually improve and expand the business when many other companies in the industry were missing estimates, having a difficult time bringing in customers, and other such mishaps. This quarter further strengthens my already-strong belief in management.

I don't have much more to say. Sales and earnings are increasing at a tremendous pace, margins are increasing during times when the industry is facing a good deal of pressure, the business continues to fuel growth, and expansion plans have been bumped up a notch (and for good reason). I think we'll be seeing some very strong quarters coming up, because of several factors.

1. The summer is often the strongest time for restaurants, and since Chipotle has done so well during the often not-so-hot time for restaurants, they should have a very good summer season.

2. This management team now has two quarters under their belts being independent from McDonald's and now that they have a better feel for things, they may continue making some changes in plans or estimates. I think any changes will be for the better for long-term shareholders.

For the 2Q, analysts are expecting an EPS of $0.41 on sales of $251.83 million. I would put very little weight on analyst estimates, simply because I don't think they research or understand the company very much. In time they probably will, but their history of consistently being overly pessimistic on Chipotle makes me think they are missing several pieces. They will probably raise estimates after seeing how strong Chipotle is at this time; it will be interesting to see how they react to this. But either way, it's nothing to worry about. As long as management keeps doing its thing I'm very confident in Chipotle's future. Analysts have very little idea of what's really going on.

Disclosure: Author has a long position in CMG

CMG 1-yr chart

Comments

[borisb]

They beat those first quarter estimates nearly 20% in a tought operating environment. And on the conference call said they think Europe is a large market for the product. Given that McDonalds has 23,000 units outside the US, the CHIPOTLES might have a 4,000-12,000 unit international macro demand opportunity.
They also said that despite Qdoba's fortress marketing tatics in "locked up markets" like St. Louis customers see right through their imitation product and drive to newly opened Chipotle outlets. i would.

[borisb]

Well the A shares traded near 80 for 2 days in a row. I suspect they come down for atleast a modest dip. I cant help wondering if most of this good news wasnt already expected, and the upped new store count for 2007 simply a stunt for some headline sparks. given this new store figure was probably known by managment more then 90 days ago. The one valuation metric iam positive about is the fact the B shares trade at about 2x sales and a bubble , if any, would carry them to 3x.
disclosure have a short position in CMG.