Chipotle's Long Term Outlook Looks Better Than Ever

On Wednesday, Chipotle Mexican Grill (CMG) reported its 1Q 2008 results:

1Q 2008 Highlights

• Revenue up 29.3% to $305.3 million from $236.1 million in 1Q 2007
• Cost of sales $278.53 million from $217.45 million in 1Q 2007
• Gross profit margin 91.2% from 92.1% in 1Q 2007
• SSS up 10.2%
• Restaurant level operating margins up 50 basis points to 21.2% from 20.7% in 1Q 2007
• Net income up 38.9% to $17.3 million ($0.52 per share) from $12.4 million ($0.38 per share) in 1Q 2007
• Profit margin 5.7% from 5.3% in 1Q 2007
• Diluted share count 33,330,000
• Effective tax rate 38.4% from 38% in 1Q 1007
• Cash flow from operating activities $48.25 million from $30.75 million in 1Q 2007
• Cash flow from investing activities -$12.24 million from -$32.67 million in 1Q 2007
• Cash flow from financing activities -$18K from $7.18 million in 1Q 2007
• $187.2 million in cash
• No debt
• 28 new restaurants opened
• 2 restaurants closed
• Average restaurant sales $1.77 million from $1.63 million in 1Q 2007
• 730 restaurants total in operation

2008 Outlook

Management is expecting the following in 2008:

• 130-140 new restaurant openings
• SSS in mid single digit range
• Effective tax rate of approximately 38.5%
• Diluted share count of approximately 33,600,000

See the Press Release, Conference Call Transcript and SEC 10-Q

Analysts were on average expecting an EPS of $0.48 on sales of $295.43 million. This is another market-beating quarter, although certainly not as much of a estimates blow-out that we saw in Chipotle's first eight quarters. I'm not going to get into much of the short-term thinking and speculation of the near future, because that is not very (if at all) important to understand the long-term strength of a business.

Management has made it clear that today's operating environment is a very rough one compared to what we've seen over the past year or two. This is a good explanation as to why growth has relatively slowed over the past couple quarters. However, even with slightly lower growth rates than we were used to seeing in much of 2007, it's great to see margins - both at the top and bottom - expanding. Chipotle is one of the few restaurants lately that has been able to control costs as well as expand margins in general. It goes to show how strong Chipotle's concept is, because even in some shaky economic times they're able to open new restaurants, bring in new and existing customers, raise margins, and improve the fundamentals of the business.

Chipotle's cash position greatly increased this quarter as well, with more than $175 million in cash with no debt. That's a nice cushion if there ever was one. On top of this, cash flow production increased nearly 60% in the quarter. Chipotle's cash reserves and cash production are at all-time highs. Not bad considering how most restaurants are doing in these times. The EPS now sits at $2.27, making the P/E of the B shares 40.64. Personally, I remain very confident in management and the future of this business. The remainder of 2008 may be tough, but when looking out five years things look better than ever.

For the 2Q 2008 analysts are expecting an EPS of $0.75 on sales of $341.92 million.

Disclosure: Author has a long position in CMG

Comments

[Dan Jacome:]

"The remainder of 2008 may be tough, but when looking out five years things look better than ever."

Amen -- we think they can fit in 3000+ units in the US before saturating, and that's probably a conservative estimate. Also long here....

2008 Apr 25 04:35 PM

[borisb:]

i agree the trailing PE ratio of the B shares 40x $2.27 is quite an interesting discount from the high point near 75x-80x just a few months ago. I would be happy if trailing eps improves to near $2.50 & $3.00 soon. Also Jack Harding, CMG CFO, quote potential of 4,000 units on occassion during 2007.

2008 Apr 25 05:20 PM

[borisb:]

the shorts criticise the valuation via the PE as too expensive. so is the growth rate 25% or closer to 40%.
one point is the cash flow grew 55% over last years first quarter. is that a relevant growth yardstick? also with the trailing pe ratio of the B shares only 40x, the PEG might be just 1.0x, which my sources say might be attractive for this type of high caliber growth company.

2008 Apr 25 08:30 PM

[borisb:]

beware of the dangerous degreed grizzlies. Mr. K your assuring cash flow figure has been clawed away by Wachovia. Ultimately we know this incredible company will have a marvelous $2 Billion in well managed annual sales and today prices we are pre-paying at 1.5x sales.

2008 Apr 28 12:05 AM

[Nextel Acce...:]

only 730 in operation? plenty of room for growth!!

2008 May 15 09:50 PM

[Dan Jacome:]

stock broke 90 support -- watch out below

2008 May 20 04:59 PM