Chipotle Reports Spicy Revenue Growth Though Margins Head South

Chipotle Mexican Grill (NYSE:CMG) announced its Q4 and full year results Tuesday, February 5. Its total revenues jumped 17.2% to $699.2 million, helped by new restaurant openings and a 3.8% increase in the same-store sales. Net income rose 6.8% to $61.4 million or $1.95 a share, up from $1.81 a share.

The company opened 60 restaurants in the quarter to raise its total count to 1,410. Chipotle reaffirmed its goal of adding 165-180 restaurants in 2013, including four in international markets. ^[1] The company will also open a second outlet of its Asian-cuisine venture, ShopHouse Kitchen, in Los Angeles, in the first half of 2013 itself.

See full analysis for Chipotle Mexican Grill

Margins Under Pressure

In January, Chipotle had warned that rising food costs were biting into its margins. The cost of food, beverage and packaging, accounted for 33.5% of the sales, up 1.3% from the fourth quarter of 2011. Apart from the higher commodity costs, the lack of higher menu prices is squeezing the margins. As a result, operating margins declined 150 basis points to 24.6%.

The company should get some respite once it raises its prices, which could be as early as in the summer of 2013. The restaurant chain has been reluctant to raise menu prices for a while now fearing that it might drive away customers to its rivals. Chipotle’s competition intensified in 2012, when Taco Bell introduced a new Cantina Bell menu consisting of burritos and burrito bowls at prices lower than Chipotle’s.

For 2013, management expects the same-store sales to be in the region of flat to low single-digit, excluding the impact of rise in menu price. Same-store sales growth is an important parameter to gauge a restaurant chain’s performance since it only includes restaurants open for more than a year. The sales of newly opened restaurants could be unusually high or low and can distort the overall revenue/store figure.

Besides the restaurants, recently introduced catering services by Chipotle, will also contribute to the top line, although it is not clear yet as to how much. In an attempt to further build the Chipotle brand and drive more customers to the stores, the company’s CEO, Steve Ells, said that the advertisement spend will rise to 1.7% of the revenues (from 1.3% in 2012), and will also feature the new catering service. ^[2]

We have a price estimate of $313 for Chipotle Mexican Grill, but we are in the process of revising our estimate to incorporate the latest earnings.

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1. CMG Investor Relations [↩]
2. Chipotle rolls out expansion, marketing plans for 2013, February 5, bizjournals.com [↩]