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Chipotle (CMG) Up 6.4% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Chipotle Mexican Grill (CMG). Shares have added about 6.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Chipotle due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Chipotle Q2 Earnings & Revenues Beat Estimates

Chipotle reported better-than-expected results in the second quarter of 2019. Its adjusted earnings of $3.99 per share surpassed the Zacks Consensus Estimate of $3.69 by 8.1%. The bottom line also grew 39% from the year-ago quarter, backed by increased revenues and strong operating margins.

Chipotle’s increased focus on augmenting customer experience by introducing food-safety programs, various sales-building initiatives and greater digital innovation resulted in revenue growth in the second quarter.

Revenues and Comparable Restaurant Sales

Quarterly revenues of $1.4 billion surpassed the consensus estimate by 2.1% and grew 13.2% year over year. This upside is primarily attributable to improvement in comps and restaurant openings. In the quarter under review, Chipotle opened 20 restaurants and closed one, bringing the total restaurant count to 2,523.

Comps in the second quarter rose 10%, driven by 7% rise in comparable restaurant transactions and a 3.5% increase in average check, offset by a 40 basis point (bps) of negative impact of deferred revenues from the Chipotle Rewards loyalty program.

Costs, Operating Highlights & Net Income

Food, beverage and packaging costs, as a percentage of revenues, increased 110 basis points (bps) to 33.7% due to increased costs of avocados and dairy products, partially offset by the benefit of menu price increases.

Restaurant-level operating margin was 20.9%, up 120 bps from 19.7% in the year-ago quarter. This upside was primarily driven by comps growth, partially offset by wage inflation, increased food costs, and marketing and delivery expenses.

Net income in the reported quarter summed $91 million, up from $46.9 million in the prior-year quarter.

Balance Sheet

Cash and cash equivalents as of Jun 30, 2019, were $299.9 million compared with $250 million as of Dec 31, 2018.

Inventory totaled $21.1 million as of Jun 30, 2019, down from $21.6 million as of Dec 31, 2018. Goodwill, as a percentage of total assets, was 0.5% at the end of the second quarter compared with 1% at the end of 2018.

2019 Outlook

For 2019, management expects comps to grow in a high-single digit compared with the previous guidance of mid to high-single-digit range. The company estimates effective tax rate between 26% and 29%. It still expects to launch 140-155 restaurants in 2019.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, Chipotle has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Chipotle has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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