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Solid Revenues & Margins to Aid Chipotle (CMG) in Q2 Earnings

Zacks Equity Research

Chipotle Mexican Grill, Inc. CMG is scheduled to report second-quarter 2019 results on Jul 23, after the market closes.

The company’s increased focus on augmenting customer experience by introducing food-safety programs, various sales-building initiatives and greater digital innovation are expected to have resulted in revenue growth in the second quarter. Further, lower marketing and promotional expenses are likely to have aided margins in the to-be-reported quarter.

Chipotle’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 12%. Backed by an impressive earnings trend, shares of the company have gained 68% over the past year, outperforming the industry’s 34.8% rally.

 

Let us see how Chipotle’s top and bottom lines shaped up in the second quarter.

Top-Line Momentum Likely to Continue

Chipotle has been shifting the strategy from giveaways, discounts and rewards to new menu items, operational excellence, enhancement of guest experience, technology-driven convenience and more aggressive brand marketing. The rollout of queso substantially aided sales in 2018. Additionally, Chipotle has been working on a new pipeline for its menu offerings. On Jan 2, the company launched its first menu innovation called Lifestyle Bowls for mobile and web orders, which resonated well with consumers. It generated more than 1.3 billion earned media impressions in the first few days of January.

Resultantly, in 2018, revenues totaled $4.9 billion, marking an increase of 8.7% from 2017. Comps in the same period improved 4%, favored by increased average check and 4% benefit from menu price increases, partially offset by 0.8% fewer comparable restaurant transactions.

Further, in the first quarter of 2019, revenues grew 13.9% year over year. Comps rose 9.9%, driven by 2% rise in comparable restaurant transactions.

Given the company’s sales-building efforts, we believe that the upside trend is likely to have continued in the second quarter as well. The Zacks Consensus Estimate pegs second-quarter sales at $1.4 billion, suggesting a 10.6% increase from the year-ago quarter’s reported figure. Further, comps in the quarter under review are expected to rise 8.1%, comparing favorably with the year-ago quarter’s 3.3% growth.

How Will Earnings Shape Up?

In 2018, Chipotle’s restaurant-level operating margin was 18.7%, marking an increase from 16.9% in 2017. This improvement was driven by increases in comparable restaurant sales combined with lower marketing and promotional spending. Further, in the first quarter of 2019, operating margin was 21%, up 150 bps from 19.5% in the year-ago quarter.

We believe that the upward trend has continued in the second quarter as well and benefitted earnings in the quarter. The consensus estimate pegs the to-be-reported quarter’s earnings at $3.70, indicating a 28.9% increase from the year-ago reported figure.

Quantitative Model Prediction

Our proven model shows that Chipotle has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat in the second quarter. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Chipotle has an Earnings ESP of +4.98%. Notably, Earnings ESP represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate.

Zacks Rank: Chipotle currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Chipotle Mexican Grill, Inc. Price and EPS Surprise

 

Chipotle Mexican Grill, Inc. Price and EPS Surprise

Chipotle Mexican Grill, Inc. price-eps-surprise | Chipotle Mexican Grill, Inc. Quote

Other Stocks to Consider

Here are a few other stocks from the Restaurant space that investors may consider as our model shows that these too have the right combination of elements to post an earnings beat in the second quarter.

Starbucks SBUX presently carries a Zacks Rank #2 and has an Earnings ESP of +0.32%. The company is scheduled to report quarterly numbers on Jul 25.

McDonald’s MCD currently has an Earnings ESP of +0.88% and a Zacks Rank #3. The company is scheduled to report quarterly numbers on Jul 26.

YUM! Brands YUM carries a Zacks Rank #2 at present and has an Earnings ESP of +1.50%. The company is scheduled to report quarterly numbers on Aug 1.

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