Chipotle Mexican Grill Outperforms in 3Q

Chipotle handily beat the Street’s 3Q estimate of $0.53 with reported earnings of $0.62. A 12% increase in same-store sales (‘SSS’) and strong new unit growth combined with good labor cost control drove the out-performance of expectations.

CMG raised the low end of its full year guidance for SSS and now expects a low double-digit increase in SSS for the year. For next year, the company expects SSS to exhibit growth in the low-to-mid single-digit range. We believe management is being conservative. We wouldn’t be surprised to see SSS trend higher than projected especially considering the new organic menu and continued strength of the overall concept, which should continue to drive strong traffic and lead to higher menu prices. CMG also expects to open between 130 and 140 stores next year, which implies approximately 18% to 20% growth and is in-line with our expectations.

Interestingly, the company expects to expand into Canada next year.

Overall, the quarter was very strong despite persistent macro consumer spending concerns. Moreover, the guidance was essentially in-line and likely conservative. Bottom line, CMG should be able to grow earnings by at least 25% next year (SSS growth of 5% plus new unit growth of 20% and at least flat margins). We also believe CMG will be able to sustain its rich valuation of 40-50x forward earnings, as investors look for growth investments in a waning economy. Net-net, there is more upside from the current levels. Finally, as discussed in our article titled Chipotle B Shares: The Proof is in the Taco, we prefer the less visible B shares that trade at an unwarranted discount to the A shares.

Disclosure: none