Chipotle Mexican Grill, Inc. (NYSE:CMG) is set to report first-quarter 2016 results on Apr 26, after the market closes.
Last quarter, the Colorado-based fast casual restaurant operator posted a positive earnings surprise of 17.30%, bringing the average surprise for the trailing four quarters to 6.15%.
Let’s see how things are shaping up for this announcement.
Factors at Play
Chipotle’s first-quarter sales were hurt by negative publicity related to the E. coli outbreak, which affected several states in the U.S. around the end of 2015. A norovirus outbreak linked to a Chipotle outlet during the same time further dented the company’s sales.
Ever since the E. coli outbreak, its restaurant traffic has been suffering. The company’s January sales comps plunged 36.4%, followed by a 26.1% drop in February. For the week ended Mar 7, 2016, comps again plummeted 21.5%. In the second week of March, however, a restaurant in Boston was shuttered after employees fell sick, leading to a 27.3% decline in comps.
The fact that Chipotle uses only healthy ingredients has long been its marketing strategy, which helped the company gain customers despite the comparatively high prices. However, given the negative publicity associated with health scares, the restaurateur may soon fall out of favor with health-conscious diners, which would affect traffic.
In fact, in March, the company stated that it expected expenses to rise on account of higher marketing and promotional costs – to bring back diners and boost sales – and other operating costs, which are anticipated to increase significantly in the first half of 2016. The company also projects elevated food costs mainly because of added food safety procedures and wastage related to the food contamination incidents.
The company also stated that it expects to incur a loss of $1.00 per share in the first quarter due to declining comps, higher expenses and lower margins, marking the first time that it would slip into the red since its IPO in 2006. (Read: Chipotle Mexican Grill Predicts Q1 Loss, Shares Slide)
Earnings Whispers
Our proven model does not conclusively show that Chipotle is likely to beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.
Negative Zacks ESP: The company’s has an Earnings ESP of -2.83%. This is because the Most Accurate estimate is pegged at a loss of $1.09 while the Zacks Consensus Estimate stands at a loss of $1.06.
Zacks Rank: Chipotle carries a Zacks Rank #5 (Strong Sell). As it is, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Instead, here are a few companies in the restaurant industry which have a favorable Zacks Rank and a positive Earnings ESP, and are therefore likely to beat earnings:
Bojangles', Inc. (NASDAQ:BOJA) , with an Earnings ESP of +5.88% and a Zacks Rank #3.
Domino's Pizza, Inc. (NYSE:DPZ) , with an Earnings ESP of +2.06% and a Zacks Rank #2.
Red Robin Gourmet Burgers Inc. (NASDAQ:RRGB) , with an Earnings ESP of +0.91% and a Zacks Rank #3.
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CHIPOTLE MEXICN (CMG): Free Stock Analysis Report
DOMINOS PIZZA (DPZ): Free Stock Analysis Report
RED ROBIN GOURM (RRGB): Free Stock Analysis Report
BOJANGLES INC (BOJA): Free Stock Analysis Report
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