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Chipotle beats Q3 earnings estimates

Nick Setyan, Wedbush Securities Managing Director joins Yahoo Finance to discuss Chipotle's Q3 earnings report.

Video Transcript

SEANA SMITH: Let's go over to Jared Blikre for Chipotle. Jared.

JARED BLIKRE: Chipotle's stock getting a nice little pop here. Some nice beats on some of the key metrics, but the top line coming in roughly in line, $1.95 billion. The Street was expecting just a little bit less, $1.94 billion. That number is up 22% year over year.

And here's the number that everybody is focusing on, comparable same-store sales. That was up 15.1%, much more than the estimate of 13.7%. Much more-- almost double what they came in with last year, which was 8.3%. So big beat there.

On their earnings-- adjusted earnings per share coming out at $7.02 versus estimates of $6.35. So a $0.75-- yeah, 72% improvement right there. Also, restaurant-level operating margin, nice beat here, 23.5%. Estimate was 22.7%, and that is up 400 basis points from last year.

New restaurants coming in a little bit shy, 41 versus the estimates of 48. On the call, probably going to be some questions about delays in that area. We know labor costs, construction delays, supply-chain issues. All of that's going to be in focus as well.

And also going to be in focus, what are they going to do with their prices? They raised prices earlier this year to compensate for increased wage costs. Are they going to do that again? Do they have pricing power? I would also mention avocado 40% off of its highs but still elevated for this time of year. Guys.

SEANA SMITH: All right, thanks, Jared. Let's bring in Nick Setyan. He's a managing director with Wedbush joining us on the phone. And, Nick, I know you're very bullish on the stock. You have an outperform rating, $2,150 price target. You're skimming through these results right now, but a beat on earnings, beat on comp sales. What are your initial thoughts on this report?

NICK SETYAN: Yeah, you know, the whisper number on the comp was, you know, low teens. And so, you know, mid-teens, 15%, that's a beat on the margins, and everyone's been missing on margins in restaurants. And so, you know, almost a hundred basis point beat on margins, that's pretty surprising. Pleasant surprise there.

Now, the commentary on Q4 does not talk about pricing. As Jared mentioned, you know, that will be a focus if they will take incremental pricing in Q4. The unit growth, obviously that's another area that will be a focus. But essentially, you know, just given particularly the strength in margins, you know, it's pretty impressive, particularly in the context of what's going on with, you know, restaurants in general and very large margin misses we're seeing across the board.

ADAM SHAPIRO: Nick, I was commenting with the team in our Slack channel. What was it, seven, eight years ago this company-- people were, you know, knives in the back because of the salmonella scare, and look at the stock today. When you mentioned margins, are they going to be able, it sounds like, to absorb price increases, or are they going to pass them on to us, do you think?

NICK SETYAN: Well, they will pass it on. They may not pass all of it on because part of it, you know, they may judge as transient in nature, you know, whether it's overtime costs or some supply-chain issues. But whatever the structural part of inflation is, whether in labor or food costs, you know, we should fully expect them to pass it on. Historically, they haven't gotten a lot of pushback when they raised prices. You know, this year, you know, they're above 10% in terms of menu-price increases, and so clearly no pushback to those types of price increases. And so I would fully expect them to continue to, you know, push the table on prices.

SEANA SMITH: Nick, why is Chipotle best positioned-- like you said in your most recent notes, among the best positioned-- excuse me-- in the restaurant industry with respect to pricing power? Why is that the case?

NICK SETYAN: You know, I think, first and foremost, consumers right now are giving the green light to, you know, a lot of companies to raise prices. They understand the inflationary backdrop to a much larger extent than we've seen historically. So I'd say that's first and foremost.

Second, you know, Chipotle has been very successful in positioning itself as a quality offering. And so, you know, just the identity of Chipotle allows them, I think, to again get a little bit more of a pass in terms of their pricing.

You know, third, they've been very strategic when it comes to delivery pricing, right? So a lot of these price increases actually are not necessarily menu-price increases but tweaks, you know, around delivery fees and delivery charges. And so it's not necessarily apparent on the menu, but it's still happening.

And, you know, with over 42% now or over 40% now in terms of digital sales, that's a big, you know, mix of sales that you can take pricing on that's not necessarily direct pricing.

ADAM SHAPIRO: Would there be a benefit to them as they're approaching, if you talk about that price target of $2,150, maybe a stock split in the near future?

NICK SETYAN: I would not expect them to do a stock split. You know, historically, you know, the higher prices have encouraged institutional investors and discouraged less volatility associated with retail investors. And so I would not expect them to necessarily follow the path of a stock split.

ADAM SHAPIRO: All right. Nick Setyan, thank you so much for joining us.