Chipotle Mexican Grill (CMG) just reported a blowout quarter in which revenue, profits, and comparable-store sales all grew by double digits. By all accounts — especially company executives — it was an extraordinary showing.
In fact, the quarter may just have been too good, judging by the way investors sent shares lower in response to the results.
Chipotle earnings set the comps bar so high that replicating this performance going forward will be near impossible, evidenced by the tone of the company’s outlook for 2015.
However, Chipotle has done much more than just experience a solid quarter. In a time when other food and beverage stocks such as McDonald’s (MCD) and Coca-Cola (KO) are coming up short, fast-casual concepts like Chipotle are proving that in the U.S., consumer sentiment remains intact.
Nonetheless, with a sky-high valuation, one that incidentally is competitive in the fast-casual space, even Tuesday’s declines couldn’t make much of a dent in the earnings multiple. Whether or not CMG stock is attractive at these levels may come down to the type of investor you are.
Chipotle Earnings
In the third quarter, Chipotle earnings showed a 31.1% jump in revenue to $1.08 billion, driven by a near 20% increase in comparable-restaurant sales that was a function of more foot traffic and a higher average ticket size. The latter was partly the result of menu-price increases that largely took effect at the end of Q2.
While customers showed a willingness to shoulder those menu-price increases, evidenced by the sales gains, the results were offset by persistent commodity inflation for key ingredients including beef, avocado and dairy items — a trend that looks set to continue for 2015. Nonetheless, Chipotle remains efficient, evidenced by the 200 basis point increase in the restaurant level operating margin to 28.8% and a near 57% profit increase to $130.8 million. Chipotle’s earnings per share soared 56% year-over-year to $4.15.
What sent CMG stock lower wasn’t the earnings but the outlook. Chipotle is predicting comparable-restaurant sales increases in the low- to mid-single digit range for 2015, which pretty much takes the extra out of the company’s extraordinary performance of late. For Q4, the company is similarly going up against a tough comp of 9.3% comparable-restaurant sales growth.
Innovation and Growth
Chipotle has been investing in mobile payments and plans to unveil an updated mobile app next month. Meanwhile over in the tech sector, Apple (AAPL) had a similarly impressive quarter on the heels of the rollout of its Apple Pay system that lets consumers make purchases using their iPhone or an iPad app.
Chipotle is considering jumping on the Apple Pay bandwagon and offering it as an option to customers in mid 2015 — if it can overcome some back-end issues with payment processing.
As Chipotle Mexican Grill matures (and the double-digit comps growth that has made appearances over much of the past decade plus wanes), there are a couple of emerging opportunities waiting in the wings to extend the momentum. As CFO Jack Hartung said during the Chipotle earnings call:
“Although we continue to believe the best use of our cash is to invest in our high-returning domestic restaurants, we plan to carefully [grow] ShopHouse, Pizzeria Locale and Chipotle outside of the U.S. as we expect they will provide attractive value enhancing growth investments in the future.”
In the interim, Chipotle continues to repurchase CMG stock as part of a buyback program for which there is $127 million remaining.
Conclusion
Chipotle remains a growth company that doesn’t appear to be removing its foot from the gas pedal any time soon, evidenced by its innovation in mobile and plans for its emerging concepts ShopHouse Southeast Asian Kitchen and Pizzeria Locale.
However, at 44 times expected full-year earnings, CMG stock remains pricey, even for growth investors. If CMG stock were to pull back to even just below $600 per share, it would be trading at a more reasonable earnings multiple of about 34, which would represent a more attractive valuation.
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As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities.
