Back in June I looked at Chipotle as a proven growth company with a special niche and loyal following. Since that time the stock (NYSE:CMG) has held up fairly well considering the market volatility. After much waiting and discussion, the company released their quarterly results on Tuesday night and blew away Wall Street’s expectations.
Earnings came in at $0.60 per share [$0.58 adjusted] while expectations were closer to $0.45. Total revenue for the company was up nearly 34% to $274.3m, and operating margins were actually 150 basis points higher at 23.2%. This last piece is especially important as many have feared increases in commodity prices would damage the company’s margins and cause a disappointment. While food costs were up nearly 1% as a percentage of revenues, CMG was able to offset that negative factor with better labor costs, price increases, and better restaurant controls.
Traffic has picked up nicely with the comparable restaurant sales up 11.6% on stores open over 12 months. Management had previously guided investors to expect mid to high single digit comps but revised their expectations to “high single to low double digit” increases for 2007.
Efficiency has been a key issue this year as investments have been made in additional cash registers, change machines and revamped food lines. The goal is to get more customers through the lines quicker during peak hours. The initiatives appear to be successful at this point as peak hours reported 118 transactions per hour versus about 108 last year. This may not seem like a big deal, but multiply 10 transactions by $9.00 average ticket by 640 stores by 365 days a year and its a big number [$21,024,000 to be exact…] Ok, maybe they’re not open on Christmas but you get the idea.
With all this concentration on improving the current stores, management has not neglected growth initiatives on new stores. The company opened 32 new restaurants in the quarter and is well on its way to meeting its goal of 110 to 120 new stores this year. Actually I would be surprised if it wasn’t closer to 125 to 130. Most of the stores this quarter were in existing markets which means less need to run an expensive marketing campaign as residents already likely know the name. In short, it was a great announcement and investors ate it up!
So the problem now lies with the share price. How much is enough? Will the company be able to match or beat increasingly optimistic expectations? One could assume the revised analysts views will get close to $2.00 for 2007 and tacking on the company’s guidance of 25% growth that would put us at $2.50 for 2008 [very rough estimates]. That still puts the stock at 40x NEXT year’s earnings. Yet we always know runaway stories like this usually go farther than most expect.
For me, I am playing it safe with my stock currently hedged with August 90’s. To quote Todd Harrison, “discipline trumps conviction” and with the market being as volatile as it is, I will be content waiting for the premium to expire and then figure out what I want to do with the stock. For those out there who are holding a long position, I would caution you to take some profits at this level and leave part of the position on to see if it can run further. Don’t get caught being too greedy in a momentum name like this.
Full Disclosure: Author has a long position in CMG.
CMG 1-year chart