A Preview of Chipotle's 2Q Earnings

Chipotle (CMG) will be releasing its 2Q 2007 results on July 31 after the market close. I thought I'd do a little preview/analysis, and see if we can come up with a good estimate.

The most recent quarter (1Q 2007) was especially impressive to me. The overall restaurant industry was feeling a lot of pressure this winter primarily because of rough weather. Analysts actually lowered their estimates for Chipotle, and were expecting a pretty big dip in growth, and margins. They were expecting the profit margin to fall down well below 5%, and in the end, Chipotle reported a profit margin of 5.3%.

When many other restaurants were reporting little or negative growth, Chipotle was able to strengthen margins, and keep up very strong growth in sales and earnings. In other words, this is a one-of-a-kind business that has been able to grow at a remarkable pace while many other restaurants hardly went anywhere.

Chipotle has reported quarterly results six times since going public in January 2006, and every time they have smashed estimates.

The chart below illustrates these results:

 
            4Q 2005    1Q 2006    2Q 2006    3Q 2006    4Q 2006    1Q 2007



EPS Est       0.11       0.12       0.25       0.27       0.28       0.32



EPS Actual    0.16       0.26       0.33       0.36       0.33       0.38



Difference    0.05       0.14       0.08       0.09       0.05       0.06



Surprise %   45.5%      116.7%     32.0%      33.3%      17.9%      18.8%

For the upcoming 2Q 2007, the 17 analysts following Chipotle are expecting an average EPS of $0.45 (low estimate $0.42; high estimate $0.48), on revenues of $262.91 million. This means they are expecting the profit margin to come in around approximately 5.5%. I think this is a low expectation for the profit margin, and one that Chipotle should easily beat.

The 2Q is a very busy time for Chipotle, and this year brought favorable weather (at least much more favorable than the weather in the 1Q), and Chipotle also made some adjustments to speed up the ordering process. The main downward pressure that people see impacting Chipotle negatively is commodity prices. Personally, I don't think Chipotle will be impacted that much from higher prices.

If it really did feel a pinch, I'm confident that management would have raised some prices on the menu, or found ways to improve efficiency. It's not like the past couple quarters have been a walk in the park with commodity prices, either. So, I think the worries about high commodity prices have been overblown. Chipotle will work through it if it really does feel a good deal of pressure from it.

The company has a very healthy balance sheet, and this management team has done a terrific job of improving efficiency. Management has said they expect higher pressure from commodity prices, so I'm confident that they have, and will continue to make the necessary adjustments. Last quarter it increased menu prices, and I'm sure they could continue to do so without losing customers.

Analysts are expecting revenue growth of 28.3%. I'm believing that sales will be able to grow at a clip closer to 29% because of more favorable weather, the moves to speed up lines, and the fact that this is a strong time for restaurants in general. So, I'm expecting revenue to come in at $264,000,000. The difficult part is coming up with a reasonable profit margin to expect.

I'm confident that at least some of the measures to increase efficiency will have come into play by now, and if commodity prices did put pressure on the company, I expect menu price increases to offset the extra cost. I'm expecting Chipotle to report a profit margin of 6%. In the same quarter last year sales were up 31.1%, and the EPS grew 57%. At this time last year the profit margin was 5.3%.

A $264,000,000 in revenue with a 6% profit margin equals $15,840,000 in net income. Let's assume that the share count will increase to 33,100,000. This translates into an EPS of $0.48, which is the high end of analyst expectations, and marks another example of its beating the estimates.

Honestly, I wouldn't be surprised if we saw the EPS come in at $0.50, because I don't believe Chipotle is experiencing as much pricing pressure as many analysts are thinking. But, I'm sticking with a little more cautious estimate just in case analysts actually have their heads in the right place this time. If the EPS were to come in at $0.48, then the TTM EPS would stand at $1.54. Add to that a P/E of 55, and the B shares would be priced at $84.70.

Anyway, I'm expecting another estimate-beating quarter from Chipotle. I love how management is executing, and think they've handled the pressure felt by the restaurant industry very well. I continue to have a lot of faith in management and think Chipotle has a great future ahead of it.

CMG 1-yr chart:

Comments

[borisb]

how is the quality of your data sources?
chipotle's new 7 day $11+ dip might have bounce potential next week,
if most quarterly metrics perform and guidance come through.
wednesday's earnings beat by Cheesecake factory might lighten investor
anxiety on restuarant stocks.

[borisb]

8 day dip expands to $12.
Baird last week questioned commodity cost risk pinching the eps upside....
but commodity cost are trending down for 2+ months,
CMG CFO said commodity cost are under control fast money late June,
and Citigroup recently posted the shares are worth one hundred.

[borisb]

nice 3 day $21 wonder bounce!