Chipotle Mexican Grill, Inc. (NYSE:CMG) continued on its impressive growth trajectory as it reported strong Q4 financials last week. Revenues for the quarter were up 23.7% to $596.7 million and net income rose 23.7% to $57.5 million. Revenue growth was primarily driven by new restaurant openings and strong comp sales growth of 11%. Chipotle’s stock continues to outperform its rivals and has gained more than 10% this year so far. Chipotle competes mostly with the quick service and casual dining restaurant chains such as Chili’s, McDonald’s (NYSE:MCD), Burger King, Yum! Brands (NYSE:YUM) and Papa John’s, among others.
Food Costs Could be the Spoiler
Food costs were 32.2% of revenues in Q4 compared to 31% for the same period in 2010. Food costs have been constantly creeping up for the company which has started to impact its profitability. For the first three quarters of 2011, food costs, as a percentage of revenue, increased with each quarter. For Q3, food costs were 33.1% of the total revenues. So why are the food costs lower for Q4?
That’s because of the menu price increases that the company implemented for the months from March to August. Thus, it comes as no surprise that food costs declined in Q4 compared to Q3. Once the effect of the menu price increase subsides, we will find the company surviving on thinner margins.
For the full year, food costs were 32.5% of revenues, an increase of 190 basis points compared to 2010. Chipotle expects food inflation to be around 5% for 2012. According to Jack Hartung, Chipotle’s chief financial officer, the company doesn’t plan to increase menu prices in 2012.  Such a move could adversely affect the profitability at a time when the EBITDA margins are deteriorating.
Revenues were partially buoyed by the opening of 67 new restaurants during the quarter. For the entire year, Chipotle opened 150 new restaurants, including one ShopHouse, to bring the total restaurant count to 1,230. For the year 2012, the company estimates 155-165 new restaurant openings.
In the conference call, the company officials were quoted as saying that the menu price increases contributed 4.9% to the 11.1% increase in comparable restaurant sales. If Chipotle indeed decides not to raise prices in 2012, it could be hard for the company to post a seventh consecutive quarter of double digit increase in comparable sales.
We have a $321 price estimate for Chipotle, which is about 10% below the current market price. We are in the process of revising our estimates to incorporate Q4 earnings.Notes: