Chipotle Q3 Preview: Sales To Remain Strong But Margins Could Degrade

by Trefis Team
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Chipotle Mexican Grill (NYSE:CMG) is scheduled to announce its third quarter earnings on October 17. The burrito chain has had a good quarter with shares of the company gaining more than 10% in the past three months, buoyed by an impressive second quarter earnings. The increase in menu prices, initiated in the second quarter and implemented on a regional basis, helped the company post a strong set of numbers.

We have a $394 price estimate for Chipotle, which is about 10% below the current market price. As the company looks set to announce its third quarter results, the following are the main points to watch out for:

Same-Store Sales Should Remain Strong

As always, investors will keep a keen eye on the same-store sales growth. After a disappointing 1% rise in the same-store sales in the first quarter, the figure accelerated to 5.5% in the second quarter. [1] Chipotle is in the process of raising its menu prices regionally. A moderate menu price hike should nudge sales without impacting customer traffic too much. Chipotle’s addition of new menu items such as ‘Sofritas’ and margarita cocktails at the start of the year might also have a positive impact on the overall sales. [2]

In addition, the company also benefits from a favorable comparison since the sales were flat in the third quarter the previous year. Therefore, things are lining up favorably for Chipotle and we should see a strong same-store sales growth in the third quarter.

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.

See full analysis for Chipotle Mexican Grill

Profitability Could Be Hurt

There could be some drag on profitability due to high cost of raw materials. In the latest quarter, the cost of food, beverage and packaging accounted for 33.1% of the sales, which is on the higher end of its historical range. [1] Increases in menu prices could bring some relief. However, the costs of avocado and beef in particular, have been persistently high. As a result, the moderate price hikes might not be able to fully offset the high costs of raw materials.

Other expenses such as labor and occupancy costs should remain in a narrow range since any increases in the operational costs should be compensated by sales growth. Overall, the restaurant level operating margins fell to 27% in the second quarter from 28.3% in the corresponding quarter in 2012. [1] The margins should continue to face downward pressure in the near term.

Restaurant Addition On Track

The company remains on track to add about 180 new stores in 2013. In the first six months of the year, Chipotle added 92 restaurants. [1] Chipotle has generally met its store guidance in the past, so we expect the company to meet its guidance this time around as well.

The company also opened the second outlet of its Chinese cuisine ShopHouse Kitchen in Los Angeles in the second quarter. Investors generally see ShopHouse as an attractive proposition with potential for many more such restaurants within the U.S. in the next few years. However, as of now, there isn’t much information with respect to the growth plans of ShopHouse. Therefore, our forecasts for the number of stores are based primarily on the expansion plans of the traditional Mexican food selling Chipotle stores. If the expansion rate of ShopHouse were to pick up, we could see some upside to our estimates.

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  1. CMG 10-Q [] [] [] []
  2. Chipotle Adding Margaritas to the Menu, April 19, 2013, []
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