Chipotle Mexican Grill Will Continue Outperforming

Shares of Chipotle Mexican Grill (CMG) are up 19% in the last three months, which is not surprising if we consider the company’s impressive performance last quarter. Chipotle had reported earnings of $4.45 per share on revenue of $1.2 billion for the quarter. This represents earnings and revenue growth of 27% and 14%, respectively, as compared to the second quarter of 2014. In fact, Chipotle witnessed 4.3% growth for its comparable restaurant sales as against the second quarter of 2014.

This growth in its comparable restaurant sales makes the stock appealing.

In the past few months, the company had struggled to drive its comp sales due to constrained supply of pork, causing shortage of products. However, Chipotle seems to be on the top of this problem as it is expected to revive its pork supply that should drive its comp sales in the second half of the year.

Re-establishment of pork-supply to drive its comp sales

Chipotle Mexican is restoring its pork supply. The company has recently announced that it will serve Carnitas in about 90% of its restaurants. In fact, Chipotle expects to have Carnitas back in all of its restaurants by the end of November 2015. Earlier this year, the company had stopped serving Carnitas at more than a third of its restaurants as it suspended one of its primary pork suppliers when routine auditing found inconsistencies between the supplier’s operations and Chipotle’s pork protocol.

Its founder, chairman and co-CEO, Steve Ells said:

“We simply will not compromise our high standards for animal welfare. Since making this decision, we have heard from thousands of our customers who have expressed support for our decision, and commended us for standing on principle. Now, we are excited to have Carnitas back in nearly all of our restaurants, and want to thank our customers for their patience while we worked to address this issue.”

Nevertheless, this decision caused a significant impact on its asset turnover. Its sales to asset turnover fell 7% despite its revenue and assets growing by 14% and 23%, respectively. However, in my opinion, this should soon change in the upcoming quarters as the company has restored Carnitas. It expects mid-to-single digit comparable store sales growth in the second half of the year.

Opening of new stores and reduction in operating costs are positives

Chipotle Mexican Grill remains on track to drive its growth through opening new restaurants. During the second quarter, the company opened about 48 new restaurants and for the first six months, it opened about 97 new restaurants, bringing the total restaurant count to 1,878. Moreover, it plans to open about 190-205 new restaurants in the second half of the year that should drive its top and bottom line performance.

In addition, the company is strategically controlling its operating costs. For the second quarter, its operating costs were 10.9%, down approximately 10 basis points from 2014. Also, its G&A costs came in at 5.9% of the sales, a decrease of 120 basis points as compared to last year. Moreover, Chipotle has increased the menu prices for its products. In fact, it has increased its menu prices in about 60% of its total restaurants. So, these moves should enable the company to improve its restaurant level operating margin, as it plans to launch menu price increase in the remaining 40% of its restaurants.

Conclusion

Chipotle Mexican Grill is still cheap. It is trading at a trailing P/E of 43.36 and a forward P/E of 34.27, indicating better earnings performance ahead. The company has profit and operating profit margins of 11.59% and 18.69%, respectively, indicating that its operations are profitable. Thus, in my opinion, it will be wise for investors to remain invested in Chipotle shares for the long run.

Published on Oct 1, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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