Everyone's favorite burrito chain, Chipotle Mexican Grill (CMG), released its earnings on February 1st and reported EPS of $1.81, just missing analyst estimates of $1.83 per share. Revenue grew 23.7% YOY to $596.7m, beating estimates by $5m. Comparable store sales, a key industry metric, grew 11.1% for the quarter and 11.2% for the full year. This marks the sixth consecutive quarter of double-digit comp increases.
What caused the EPS miss? Chipotle's biggest enemy: food inflation. Food costs represented 32.2% of the Company's expenses for the quarter, an increase of 120 basis points from 2010 and its highest level since Q3 2008. The Company experienced food inflation of 9.0% for the quarter, which was only partly offset by a 4.9% increase in menu prices. Although food price inflation is affecting the entire industry, Chipotle has been hit especially hard, as the Company spends more on food than many of its peers due to its commitment to 'Food with Integrity'.
Under these conditions, Chipotle's strong financial performance seems to be threatened for the first time in years. Management is predicting that comp increases will fall into the single digits, that food inflation will be a constant battle and that they will have to continue to increase menu prices. Why hasn't the stock fallen further from its 52-week high of $373.37? How is the stock maintaining a P/E ratio in the upper 50's?
The answer is that Chipotle's long-term growth prospects are unfolding in front of investors' eyes. First, let's take a look at Chipotle's bread and butter, domestic operations. The Company opened 150 restaurants in 2011 and ended the year with 1,230 locations (about one fifth the number of domestic Taco Bell locations). Management plans to open more locations in 2012 than any previous year, adding 155 to 165 new restaurants. The Company has also increased the expected sales range for new restaurants, from the previous guidance of $1.4m - $1.5m to $1.5m - $1.6m. All of this indicates that Chipotle has ample room to expand domestically.
The second area in which Chipotle is showing signs of growth is in the international market. The Company opened its second European restaurant in London during the third quarter of 2011 and will open 2 additional London locations during the second half of 2012. Chipotle's burritos will also be available in Paris this spring, as the Company finishes construction on its first restaurant in France. These beginning phases of Chipotle's international expansion are setting the stage for long-term growth.
The third major growth prospect for Chipotle is ShopHouse Southeast Asian Kitchen. The Company opened its first ShopHouse location in September 2011 in Washington D.C. and has plans to open a second location later this year. CEO Steve Ells says that the early success of ShopHouse, much like the quick success of Chipotle, is a testament to his dedication to serving 'Food With Integrity' -- fresh food that is prepared using classic cooking techniques, by a team of top-performing employees.
Management continues to emphasize that they are focused on expanding the Chipotle restaurant concept domestically. However, they are clearly hedging against domestic saturation with alternative strategies for long-term growth. Expanding the ShopHouse concept and pursuing international expansion will diversify the Company and allow it to continue its rapid growth for years to come. In addition to this, there is always breakfast. The Company has been serving breakfast burritos in the Dulles Airport for sometime now.
Disclosure: I am long CMG.
