Chipotle Collapses Post-Earnings; Now a Bargain for Long Term Investors

Yesterday, Chipotle (CMG) reported its 2Q 2008 results. (Click here for the conference call transcript.)

Highlights

• Revenue up 24.2% to $340.8 million from $274.3 million in 2Q 2007
• SSS up 7.1%
• Cost of sales $302.44 million from $243.67 million in 2Q 2007
• Gross margin 88.8% from 88.8% in 2Q 2007
• Operating margin 11.2% from 11.2% in 2Q 2007
• Restaurant level operating margins down to 22.4% from 23.2% in 2Q 2007
   

• Net income up 22.5% to $24.5 million ($0.74 per share) from $20 million ($0.60 per share) in 2Q 2007
• Profit margin 7.2% from 7.3% in 2Q 2007
• Diluted share count 33,284,000
   

• Cash flow from operating activities $47.39 million from $31.29 million in 2Q 2007
• Cash flow from investing activities -$39.03 million from -$35.71 million in 2Q 2007
• Cash flow from financing activities $8.8K from $1.74 million in 2Q 2007
   
• Opened 49 new restaurants
• Closed/relocated 1 restaurant
• Average restaurants sales $1.78 million from $1.67 million in 2Q 2007
• Total of 778 restaurants in operation

Outlook

In fiscal 2008, management expects...

• SSS growth in the mid single digits
• 130 to 140 new restaurant openings
• Stock compensation expense of $12.5-$13 million
• Effective tax rate of approximately 38%
• Diluted share count of approximately 33,400,000

Press Release

Analysts were on average expecting an EPS of $0.75 on sales of $343.89 million. So Chipotle narrowly missed estimates, making this the second time since going public that the company missed analyst estimates. However, this by no means was a bad quarter. Cash flow production rocketed forward, restaurant expansion continues to pick up every quarter, and margins held incredibly steady. Considering the times and the doom and gloom sentiment out there with retail, you can't ask for much more than what Chipotle reported here.

The company's balance sheet and cash flow production continue to grow stronger every quarter and the company is not relying on anything but its own cash to fuel growth. Sales and earnings growth weren't quite as high as they have been in recent months, but given the economic environment that we have with high food costs and other such things, I can't complain. The key here is that margins held steady and cash flow production is on the rise at an impressive rate.

Chipotle will be able to work through any further hardships that may be ahead, both because the company is in a great cash situation as well as the fact that it will take a lot to keep customers from buying their food at Chipotle. Chipotle is one of the most efficient restaurant businesses in the country with very popular food, so an economic downturn from here still probably won't have much of a long-term impact.

In after-hours the B shares were down more than 7% to near $72 per share. After yetserday's results, the TTM EPS stands at $2.41. Assuming the B shares fall to $72, this would put the P/E just below 30. The P/E has not gotten much lower than that since the company went public, although this isn't the best measurement because the company has not been public for a very long amount of time.

However, considering the long-term picture for Chipotle remains intact, I don't think I would be going too far to call that a bargain price for long-term investors. The stock has always been very volatile and I can't say where it will go in the short-term, but I think a price at or below the $70 area would be hard to resist.

Over these next few days I will be looking closely to add to my position. I may wait another week or so depending on what the stock does, because earnings season will often make a stock all the more volatile. But based on what the market's reaction is after-hours, I think it is unlikely that I won't add to my position soon.

But never mind, that isn't what matters right now. What does matter is the fact that management remains confident in Chipotle's future and ability to work through tough times; time and time again they've shown us that the company's margins are rock solid and the company is a cash producing machine. Long-term, that's really what counts and why I remain as confident as ever in the company's future.

For the 3Q 2008, analysts are on average expecting an EPS of $0.75 on sales of $355.62 million.

Stock Position: Long CMG-B.

 

Comments

[borisb]

the B shares have crashed 54%.

[j-dub]

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