Chipotle Mexican Grill (NYSE:CMG) announced its first quarter earnings which show signs of improvement in the subsequent quarters. Total revenues jumped 13.4% to $726.8 million helped primarily by new restaurant openings. The company added 48 new restaurants this quarter and is on course to meet its target of opening 165-180 restaurants by the year end. Chipotle’s net income swelled 22% to $76.6 million, or $2.45 per share. 
The number most eagerly awaited by the market was the comparable sales growth. The headline figure stood at an unimpressive 1%, much lower than its historic levels. However, excluding sales of two additional days in 2012, comparable sales were up 3%. In 2012, sales benefited due to a leap year and because Easter fell on April 8 as opposed to March 31 this year. The restaurant chain was closed on Easter.
Posting solid same store sales was going to be a challenge this quarter since the corresponding figure for last year’s quarter stood at a staggering 12.7%. So, these results come on top of a high base. Comparable sales, or same-store sales, is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation.
We believe that the next few quarters could post stronger sets of numbers because of menu price increases, to the tune of 3%, expected to be implemented by the end of summer. On top of that, some of the new items such as the ‘Sofritas’ and the soon-to-be-introduced Margarita cocktails could help boost sales.
Operating Costs Show Signs of Encouragement
Although the cost of raw materials has been inching upward, the company has done well to contain them within a reasonable level, especially since there were very few price hikes in the trailing twelve months. The cost of food, beverage and packaging (as a percentage of revenues) rose 80 basis points to 33.0%. However, on a sequential basis, it is still down 50 basis points.
Also, as already mentioned, the management had earlier announced that the restaurant chain will raise menu prices by the end of summer. That should bring some relief to the rising costs of commodities as well.
Other major expenses such as labor and occupancy costs were relatively stable. These are partially fixed costs and are relatively independent of total sales. Historically, these have declined (when expressed as a percentage of revenues) since the comparable sales growth had outpaced the rate at which these costs have risen.
However, due to tepid same-store sales, these costs could not witness any reduction this quarter. But if sales were to accelerate beginning from the second quarter, we could very well see the historical trend continuing further. For the full year, we expect a slight improvement in these partially-fixed costs.
Overall, Chipotle’s results look solid with a potential for upside in the subsequent quarters. The stock rally witnessed in the last six months looks justified.
We have a price estimate of $344 for Chipotle Mexican Grill, but we are in the process of revising our estimates to incorporate the latest earnings.Notes: