Chipotle (CMG) Stock Gains On Q2 Earnings Beat & Solid Comps

Chipotle Mexican Grill, Inc. (NYSE:CMG) reported second-quarter 2017 earnings per share (EPS) of $2.32, surpassing the Zacks Consensus Estimate of $2.16 by 7.4%. The figure also increased significantly from the prior-year quarter earnings of 87 cents, given a substantial rise in revenues.

Total revenue rose 17.1% from the year-ago quarter to $1.17 billion driven by new restaurant openings and solid comps growth. However, revenues missed the consensus mark of $1.18 billion by over 1%.

Notably, the company’s shares rallied nearly 2% in afterhours trading on Jul 25, in response to the solid bottom-line performance and improved comps.

Chipotle Mexican Grill, Inc. Price, Consensus and EPS Surprise

Chipotle Mexican Grill, Inc. Price, Consensus and EPS Surprise | Chipotle Mexican Grill, Inc. Quote

Behind the Headline Numbers

Comps grew 8.1% in the quarter. The increase was mainly on the back of improved customer traffic, along with an increase in average check given reduced promotional activity. However, the comps rise was lower than the prior-quarter growth of 17.8%.

Meanwhile, food costs, as a percentage of revenues, decreased 10 bps to 34.1% given reduction in food waste, improvements in the company’s food safety procedures, lower paper and packaging costs as well as benefit of menu price increases in select restaurants, somewhat offset by higher avocado prices.

General and administrative expenses comprised 6% of the total revenue, reflecting a decrease of 110 bps year over year, chiefly due to sales leverage.

Restaurant level operating margin was 18.8%, up 330 bps from 15.5% recorded in the year-ago quarter. The upside was primarily driven by sales leverage coupled with more efficient scheduling and deployment of the company’s managers and crew.

Marketing and promotional expenses, as a percentage of revenues, decreased 70 bps to 3.7% due to lower promotional costs and sales leverage.

Guidance for 2017

Chipotle reiterated its previously announced guidance for full-year 2017 as comps are still projected to increase in high single digits. Meanwhile, new restaurant openings are anticipated in the range of 195–210.

Currently, the company expects G&A to be in the $290 million range for the year, slightly lower than previous guidance of $300 million.

It is also working toward its stretch goal of achieving adjusted earnings per share of $10.00 and restaurant level operating margin of 20% for the year.

Our Take

2017 has been sort of a turnaround year for the company so far. Finally, sales have started bouncing back from the massive food safety scandal related to the E.coli and norovirus outbreak, which surfaced toward 2015-end and resulted in sales plunging and hurting its reputation.

Continued focus on food safety, simplification of restaurant operations, menu innovation, enhancing digital orders and increased brand marketing should drive growth, going forward.

However, the recent closure of a Washington-area outlet due to an apparent norovirus alert has started a fresh round of food-safety scare. Evidence of rodents was found at a Dallas outlet, further adding to the woes.

Zacks Rank & Upcoming Releases

Chipotle has a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other firms in the restaurant space, BJ's Restaurants, Inc. (NASDAQ:BJRI) and Dunkin' Brands Group, Inc. (NASDAQ:DNKN) are expected to release their second-quarter numbers on Jul 27. The Zacks Consensus Estimate for the quarter’s earnings is pegged at 51 cents for BJ's Restaurants and 62 cents for Dunkin' Brands.

Yum! Brands, Inc. (NYSE:YUM) is scheduled to report its quarterly numbers on Aug 3. The Zacks Consensus Estimate for the quarter’s bottom line is pegged at 61 cents.

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