North America

Earnings Preview: Chipotle Mexican Grill Q1 2017 (CMG)

By: Craig Bowles

Overview

Chipotle Mexican Grill (CMG) is slated to report 1Q 2017 earnings after the close of trading on Tuesday, April 25th. Results are expected by 4:10 p.m. ET followed by a conference call at 4:30 p.m. available through Chipotle Investor Relations.  Chipotle develops and operates fast-casual and fresh Mexican food restaurants.

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Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS): The company normally reports a “clean” earnings number. Analyst consensus is $1.27 (range $0.84 to $1.27). (Source: Yahoo! Finance) Consensus was $1.34 three months ago.
  • Revenues: Analyst consensus is $1.05 bln (range $1.02 bln to $1.07 bln).
  • Comparable Store Sales: Analyst consensus is 15.1%.
  • Chipotle’s Price/Sales at 3.6 compares to a 5-year average of 4.5; Price/Book 9.8 compares to a 5-year average of 9.3; Price/Cash Flow 40.7 compares to a 5-year average of 28.9.
  • Analysts view CMG with 10 Buy, 18 Hold, and 7 Sell ratings, according to MarketBeat.com.
  • Insiders bought 400 shares in the last three months and sold a net 72,962 shares in the past year. (source: NASDAQ.com) In May 2016, Chipotle increased a $1.9 billion stock buyback program by an additional $100 million. The company spent $838 million on share buybacks in 2016 or more than double the cash generated in the same period.
  • Chipotle results could impact other quick service restaurant companies, such as Darden Restaurants (DRI), Yum! Brands (YUM), McDonald’s (MCD) and Starbucks (SBUX).
  • Chipotle shares have a 1-day average price change on earnings of 6.25%. Options are pricing in an implied move of 4.78% off earnings.

Recent News

  • 04/18: Wells Fargo expects Chipotle investors to focus on: (1) 1Q17 monthly SSS trends particularly given industry sales volatility and that January ran +24.6%, (2) quarter-to-date SSS trends, (3) update on top-line initiatives, specifically any early consumer response to the company’s first national TV ad campaign (kicked off 4/10/17), (4) cost control progress/visibility, (5) menu pricing plans & (6) 2017 “stretch” guidance update, according to a post on Barron’s.com.
  • 04/07: Chipotle board wrote new rules that say top executives need to get the stock to an average price of $650 (up 45%) over 60 days by February 19, 2020 if they want to receive their full reward, according to a post on Barron’s.com.
  • 04/03: Chipotle has shifted from months spent apologizing for its food-quality issues to now promoting its preservative-free tortillas and “clean” menu, with no artificial ingredients or industrial processes, according to a post on Barron’s.com.
  • 03/30: Chipotle CEO Steve Ells is taking the offensive and criticizing other competitors for misleading customers by claiming their menu is “clean,”, according to a post on Barron’s.com.
  • 03/27: Wedbush checks indicate continued comp momentum for Chipotle as Q1 progresses but believes the risk is now from food cost inflation citing a recent uptick in avocado costs and protein cost worries following the Brazilian meat scandal, according to a post on Barron’s.com.

Technical Review

Chipotle shares reached a $758.61 all-time high on August 5, 2015. The stock got down to $352.96 in October 2016 before this rebound. 2016 found resistance at $542.50 early in the year, so could act as resistance again. Above that is the $650 to $750 range. (Chart courtesy of StockCharts.com)

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Summary

Analysts are optimistic that Chipotle has turned the corner, so it’s surprising that we don’t see a general shift from neutral to bullish. Previous guidance suggested high single digits for 2017 comp store sales. Rising food costs could pose a problem assuming Chipotle can move beyond E. coli troubles, drug-related charges, and tweets about sex and drugs in an effort to appeal to millennials. Perceived integrity has declined for all industries in recent years, so customers may be more forgiving. Stock buybacks have increased dramatically but insiders have been mostly inactive. The company has missed analyst expectations by an average of 37c the past three quarters but beat by 7c in the year-ago quarter. Estimize consensus for an EPS of $1.27 on revenue of $1.053 bln suggests adjustments to guidance are ongoing and compares to analyst consensus of $1.27 on revenue of $1.05 bln.

 

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