Chipotle Smashes Estimates For Eighth Consecutive Quarter

Yesterday, Chipotle Mexican Grill (CMG) reported 3Q 2007 results (see conference call transcript).

3Q 2007 Highlights

• Revenue up 35.6% to $286.4 million from $211.26 million in 3Q 2006
• Cost of sales $255.04 million from $193.41 million in 3Q 2006
• SSS up 12.4%
• Restaurant level operating margins 33% from 31.5% in 3Q 2006
• Net income up 74.6% to $20.6 million ($0.62 per share) from $11.8 million ($0.36 per share)
• Profit margin 7.2% from 5.6% in 3Q 2006
• Diluted shares outstanding 33,171,000
• Cash flow from operating activities $43.53 million
• Cash flow from investing activities -$35.47 million
• Cash flow from financing activities $3.38 million
• Opened 28 new restaurants (26 in existing markets; 2 in new markets)
• Operating total of 668 restaurants
• Removed growth hormone rBGH from cheese in 90% of restaurants
• All restaurants serve naturally raised pork
• Approximately 80% of restaurants serve naturally raised chicken
• Approximately 50% of restaurants serve naturally raised beef

Fiscal 2007 Outlook

• Expecting to open 110-120 restaurants - already have opened 88 restaurants in first three quarters
• Expecting SSS increases in low double digit range
• Expecting effective tax rate of 37.7%
• Expecting diluted share count of 33.25 million

Fiscal 2008 Outlook

• Expecting new restaurant openings of 130-140
• Expecting SSS increases in low to mid single digit range
• Expecting effective tax rate of 37.7%

Put this down as the eighth consecutive quarter that Chipotle has smashed estimates (every quarter since going public, actually). Analysts were on average expecting an EPS of $0.53 on sales of $279.33 million. This quarter, Chipotle produced the most cash flow it ever has in an individual quarter. The company is on track with its restaurant expansion estimates, growth is phenomenal in restaurants, overall sales, and with earnings. The most amazing thing I see with Chipotle is how they can raise margins nearly every quarter while expanding at such a quick rate. This is partly because Chipotle restaurants do not cost so much to build when compared to other restaurants (only in the $900K area), and the company continues to get more efficient quarter after quarter.

Lately a lot of Chipotle investors have been worried about how highly priced the stock is. When accounting for 3Q results, Chipotle's EPS stands at $1.93. Yesterday, the B shares closed at $120.20. That puts the P/E at 62.3. While this certainly is not cheap, we're talking about a company that in the past two quarters has seen earnings increase 70%+. The stock will not be getting much cheaper anytime soon, in my opinion. Chipotle is a one-of-a-kind business, both in terms of the actual restaurants which are really creating their own industry, but also in terms of their financial results over the past couple years. The company has been reporting monstrous results quarter in and quarter out, growth has been sensational with sales and earnings, and margins continue to improve.

How cheap is a stock behind a company like this going to get? I'm not saying there's no chance the stock will go down. What I am saying is that the high valuation pegged on Chipotle shares isn't exactly unjustified. The stock will be very volatile in the future and will almost certainly get whacked hard in the future when/if they miss expectations. So far they've had no problem at all beating expectations (analysts still don't seem to have the company figured out), but that won't always be the case.

I remain extremely confident in Chipotle's management and future. Expansion is going very well, margins are improving and staying pretty steady, costs are very much under control, the balance sheet is healthy, the business is producing cash flow stronger than it ever has; basically, the business is in great shape. My positions in Chipotle (which I made this past January and February) have already doubled, so obviously the market has been happy with the company's performance. I think more strong results are to come and I am definitely not considering selling. It's important to keep in mind that these past two quarters are historically the company's best quarters (summer months are often the strong time for restaurants). So, we probably won't see quite as incredible growth like we've seen real recently.

For the coming 4Q 2007, analysts are expecting an EPS of $0.49 on sales of $286.42 million. Chipotle should easily beat these estimates; I think expecting an EPS in upper $0.50s is reasonable and that's what I'll be looking for come next quarter.

Disclosure: Author holds a long position in CMG