Chipotle Down on Q1 Earnings Miss, Beats Rev - Analyst Blog

Share price of Chipotle Mexican Grill Inc. CMG plunged 6.3% after it announced mixed first quarter 2014 results on Apr 17.

However, the share price decline can also be attributed to the first menu price increase for this quick-casual restaurant chain in three years.

Menu Prices to Go Up

With the increase in popularity of its restaurants, Chipotle Mexican intends to raise prices in the range of 3.0% to 5.0% in the coming weeks. The menu price hike comes in the wake of higher commodity costs that have pressurized margins.

Earnings Discussion

Chipotle's first quarter 2014  earnings missed the Zacks Consensus Estimate while revenues beat the same.

Adjusted earnings of $2.64 per share in the first quarter of 2014 missed the Zacks Consensus Estimate of $2.83 by 6.7%, which we believe was due to higher expenses. However, earnings were up 7.8% year over year driven by an increase in the top line.

Revenues grew 24.4% year over year to $904.2 million and beat the Zacks Consensus Estimate of $871.0 million by 3.8%. The better-than-expected results were backed by higher comparable sales (comps) growth and unit expansion.

Behind the Headline Numbers

Comps grew 1240 basis points (bps) year over and year and 410 bps sequentially to 13.4% in the quarter, primarily driven by higher traffic and also due to an increase in average check.

Total operating expenses were $768.5 million, up 26.7% year over year due to higher food, beverage and packaging and other operating expenses.

Food costs as a percentage of revenues increased 150 bps to 34.5% due to higher beef, avocado, and cheese costs. However, labor costs as a percentage of revenues, contracted 60 bps to 23.0%.

Restaurant level operating margin declined 40 bps year over year to 25.9% in the reported quarter due to higher food costs, partially offset by favorable sales leverage in labor and lower occupancy costs.

Liquidity

Chipotle ended the quarter with cash and cash equivalents of $411.6 million, up from $323.2 million in the previous quarter.  Total shareholder equity was $1.65 billion, up from $1.54 billion in the previous quarter.

Comps Guidance Upped

The company has increased its comps guidance for 2014. It expects comps in the high single digit range excluding any menu price increase compared to the previous expectation of low to mid single digits comps increase.

In 2014, Chipotle expects to open 180 – 195 restaurants.

Our Take

After reporting a four quarter average earnings surprise of 2.08% in 2013, Chipotle missed the Zacks Consensus Estimate in the first quarter of 2014 owing to higher expenses. These higher expenses mainly reflect inflationary pressures in beef, avocado, and cheese prices. In fact, according to the U.S. Department of Agriculture, food prices in the U.S are expected to increase in the range of 2.5% to 3.5% in 2014.

Though traffic trends have remained fairly stable for this Zacks Rank #3 (Hold) company over the past few years, we need to wait and see whether the increase in prices takes a toll on the same.

Some better-ranked stocks worth considering in the restaurant industry include Ignite Restaurant Group, Inc. IRG, Jack in the Box Inc. JACK and The Wendy's Company WEN. All these stocks sport a Zacks Rank #1 (Strong Buy).