Chipotle Earnings Preview: CMG Stock Heading Higher?

Chipotle's potential could still outweigh its lofty valuation

Chipotle Mexican Grill (CMG) reports Q4 earnings Thursday morning before the close, and Wall Street is expecting some of the most robust Chipotle earnings in the past two years. Good things are happening in Denver, but is it enough to keep CMG stock climbing higher?

Chipotle-earnings-CMG-stockThat’s open for debate … but good Chipotle earnings certainly can’t hurt.

Chipotle stock is trading with 10% of its all-time high of $550.28, which was set in November, though CMG stock is down roughly 8% for the year-to-date. To keep pace with its three-year annualized total return of 29.5%, CMG needs to hit $637 by the end of 2014.

I’ll explore whether Chipotle can do it.

Q4 Chipotle Earnings Preview

Analysts expect Chipotle earnings to increase 30% year-over-year to $2.53. On the sales front, it’s expected to boost revenues by 18% to $826 million. In October, CMG management called for mid-single-digit comparable restaurant sales growth in 2013; over the past four quarters, that number has averaged 4.1%. Meanwhile, in Q4 2012, its comparable store sales grew by 3.8%.

I’ll go out on a limb by suggesting this quarter’s comp growth will be 5.5%, or 220 basis points higher than a year earlier. If so, comp growth for all of 2013 will be 4.6%, or mid-single digits. Anything higher than 4.6% would be viewed as encouraging, and should help CMG stock move higher.

CMG Stock Growth Drivers

Three things are driving CMG stock at this point:

  1. Chipotle continues to add stores. In the first three quarters, Chipotle opened 129 restaurants, and its guidance for 2013 is between 165 and 180. Considering it has averaged 57 store openings in Q4 the last three years, it’s safe to say it will hit the high end of its guidance. The simple fact is Chipotle has plenty of room for expansion. The chain has 1,525 restaurants in the U.S., including one in Watertown, N.Y., a town with 28,000 people. Meanwhile there are just six in Toronto, the fourth-largest city in North America. This growth potential alone should be able to drive Chipotle earnings for the next couple of years, if not longer. It’s definitely the biggest positive for CMG stock.
  2. Concepts. The last time I wrote about CMG stock, it had opened two ShopHouse Southeast Asian Kitchen restaurants in Washington and Los Angeles. That number is up to six with three on each coast. Previously I’d mentioned that Miller Tabak + Co. analyst Stephen Anderson figures CMG can open as many as 400 of the brand. Like any good restaurant chain, it’s going to take its time working out the kinks before rolling the brand out in a bigger way. While there’s no guarantee that this is going to take flight, the early results seem promising. Throw in Chipotle’s test concept Pizzeria Locale, and you’re looking at a company with a lot of irons in the fire. While distracting, I think it’s a necessary part of growth.
  3. Catering. It began as a test in early 2013 and was rolled out across the country in late October. Chipotle earnings should give us an idea how it’s doing. In the company’s Q3 conference call, Monty Moran stated that stores offering catering generated about 1% of their overall revenue from this new endeavor. It might not seem like a lot, but rolled out across 1,525 stores, it should make a meaningful contribution. In many ways I see this as very similar to online retail and its contribution to brick-and-mortar stores. Any self-respecting retail chain is generating 10% of its overall revenue online. I don’t see why Chipotle can’t hit that type of number within five to 10 years. If it did, there’s no telling how it would affect CMG stock.

Chipotle expects to open between 180 and 195 restaurants in 2014. Across its 1,539 locations, it expects comparable restaurant sales growth in the low single digits this year, excluding the price increases it expects to implement in the middle of 2014. In October 2012, when CMG provided full-year guidance for 2013, it went with flat- to low-single-digit comparable restaurant sales growth.

Those were conservative in nature.

I think there’s a good chance Chipotle will deliver mid-single digits once more in 2014. If it does, I don’t think the premium valuation attached to CMG stock will be hurt very much. In fact, it might even see some expansion.

Unless Chipotle earnings lay an egg Thursday or the markets fall off a cliff, I think CMG stock will test its all-time high within the two to three months. I’d wait, however, until after earnings to do so.

Better safe than sorry.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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