Chipotle Mexican Grill (CMG) is scheduled to release its fourth quarter earnings on February 1 at 1 PM. For Q4, we expect EPS of $1.91 and revenue of $594.2 million. The consensus expectation is for EPS of $1.82 on revenue of $589.7 million.
Chipotle remains well positioned to capture excess demand through productivity growth and price increases. We expect 4.5% pricing and 5.7% transaction growth to result in another quarter of >10% SSS growth in Q4.
The recent 4.5% price rollout, completed in August, positions Chipotle for 27%+ unit-level EBITDA margins in 2012 as commodity cost inflation subsides from recent levels. We also believe, and management confirmed, that room for further pricing remains if necessary, particularly on the West Coast.
However, commodities are expected to constrain earnings growth, as food and beverage costs are expected to rise 150–200 bps despite 4.8% of price (20 bps higher than in Q3/11) due to higher meat, corn, and rice costs, partially offset by some relief in avocados. Incremental marketing expense of approximately $4 million (Chicago culinary events and animated film) will also pressure margins
Third Quarter Results & Earnings History
Revenue for the quarter was $591.9 million, up 24.1% from the prior year period. The growth in revenue was the result of new restaurants not in the comparable base and an 11.3% increase in comparable restaurant sales.
Net income for the third quarter of 2011 was $60.4 million, or $1.90 per diluted share, compared to $48.2 million, or $1.52 per diluted share, in the third quarter of 2010. Restaurant level operating margin was 26.7% in the quarter, a decrease of 100 basis points from the prior year period. The decrease was primarily driven by food cost inflation partially offset by leverage from higher restaurant sales. G&A costs were 6.3% of revenue, down 70 basis points from the prior year period.
During the quarter CWG opened 32 new restaurants including our new ShopHouse Southeast Asian Kitchen, bringing the total restaurant count to 1,163.
CWG reported an EPS of $1.59 in Q2 and $1.46 in Q1 of 2011 on revenues of $571.6 and $509.4 million respectively.
Our Take
Wedbush Securites maintains an outperform rating on the company with a price target of $400. The PT is based on a 1.2x PEG multiple on their 2012 EPS growth estimate, in line with Chipotle's growth peer group.
On January 4th, 2012, Goldman Sachs added CWG to America's conviction list with a buy rating. Deutsche Bank also raised its rating to Buy from Hold and raised price target to $390 from $320.
As for the industry, Comp store sales trends were stronger than most expected across the restaurant space, particularly in December. We believe continued outperformance in already industry-leading SSS growth and unit-level economics, combined with mid-teens unit growth, renders the valuation premium justifiable.
