Chipotle Mexican Grill (CMG) reports first-quarter earnings Thursday before the bell. CMG stock has been on fire the past year, up 56% since this time last April, putting it well ahead of other restaurant stocks.
CMG stock has performed so well, there is speculation that a bubble exists for Chipotle stock and a select group of eight other companies.
I personally don’t believe a bubble exists. I think investors are just willing to pay more for quality. While Chipotle is certainly no bargain at the moment, I’m confident that three things in its Q1 report will move CMG stock higher.
But if these things fall short of expectations, you can bet on a correction.
Q1 Chipotle Earnings Preview
Analysts expect CMG to grow earnings per share by 21% to $2.85. That’s expected to come on a 20% sales hike to $873 million. In its Q4 2013 earnings release, CMG indicated that it will open as many as 195 restaurants in 2014. In Q1 2013, it opened 32 restaurants; I’d expect approximately the same amount in Q1 2014.
As for comparable restaurant sales, it expects them to grow in the low- to mid-single-digits, excluding any menu price increases in 2014. Last year’s first quarter saw 1% comps from an outlook of flat to low-single-digit comps in 2013.
CMG Stock Mover #1
CMG delivered 5.6% comps in 2013, which was well ahead of its outlook for the year. After a 1% increase in Q1 2013, it went on to book quarterly increases of 5.5%, 6.2% and 9.3%. It expects to generate more business this year than last — low- to mid-single-digits versus flat to low-single digits — suggesting that investors should be looking for Q1 2014 comps of 2% or more. Anything below 2% should cause investors to pause, while anything above 4% is a sign business is booming and should move CMG stock higher. Anything in between is business as usual.
CMG Stock Mover #2
Chipotle revealed in its Q4 conference call that food costs will continue to rise in 2014 due to drought conditions over the past two years. Particularly affected are avocado and beef prices. For a while in early March, America was freaking out that guacamole was going to disappear from Chipotle’s menu. While that’s not going to happen, it did indicate that CMG would consider reducing its purchases until avocado costs dropped to historical norms.
But that wasn’t the only thing happening with food costs…
Food costs increased year-over-year by an average of 80 basis points in each of the four quarters in 2013. Its food costs as a percentage of sales equaled 33.0% in the first quarter last year and had risen to 33.9% by the end of the year. While Chipotle has been pretty good about controlling food costs over the past five years — 270 basis point increase from 30.7% in 2009 to 33.4% in 2013 — if this continues well into 2014, you can expect price increases on the menu come late summer.
As long as the food costs as a percentage of sales don’t increase by more than 100 basis points, it’s safe to say CMG stock won’t be retreating much. But a significant drop in the amount of the increase would result in a huge move for its stock price.
CMG Stock Mover #3
As I said in my Q4 2013 earnings preview, CMG’s catering business could become a very important revenue stream in the years ahead. In the fourth quarter, catering sales accounted for as much as 1.5% of overall revenue in its Denver, St. Louis, Seattle and San Francisco markets. With New York City not even open for business on the catering front, you can expect a good push from this market sometime in 2015.
Let’s assume CMG can grow catering from 1% of revenue today to 5% in 2019. With five-year overall revenue growth of 15%, we’re looking at 2019 catering revenues of more than $300 million. If it adds 185 stores each year for the next five it will have 2,520 by the end of 2019, which works out to additional revenue per store of $128,000 — a 6% increase without even factoring in price increases.
I’d be looking at the amount of coverage CMG management gives catering both in its earnings press release but also in its conference call. I’d be less concerned about the actual number in terms of percentages because it’s still early days. However, much like Taco Bell adding breakfast to its daily offerings, this adds to the productivity of each of its stores. And with industry-high margins, this could be a big shot in the arm for CMG stock.
Bottom Line for CMG Stock
While I see comps, food costs and catering as the three most important issues in this earnings report, it’s also a good idea to keep an eye on its nascent concepts — ShopHouse Southeast Asian Kitchen, Pizzeria Locale — to make sure they’re both heading in the right direction. Again, both are early in the game, so it’s more important that you study the tone of management rather than any financial data presented.
In the long-term, these three (or four, if you count the concepts) story lines will be a big part of moving CMG stock ever higher. If any of these seem negative in any way, you might want to reconsider owning the stock. However, if all four shine as expected, look for Chipotle stock to take off again.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.