Chipotle's (CMG) Shares Surge After Earnings Beat In Q1

Chipotle Mexican Grill, Inc.’s (NYSE:CMG) first-quarter 2018 earnings surpassed analysts’ expectations while revenues were in line with the same.

Adjusted earnings of $2.13 topped the Zacks Consensus Estimate of $1.54 by 38.3%. Earnings also grew 33.1% from the year-ago quarter driven by higher revenues and lower food costs.

Chipotle Mexican Grill, Inc. Price, Consensus and EPS Surprise

Chipotle had a good share of negative publicity throughout 2016 due to an issue of food-borne illnesses that surfaced toward 2015-end. As a safety measure, the company was forced to close several outlets. Ever since then, this fast-casual Mexican chain has been undertaking aggressive efforts to restore its economic model as well as regain customer trust.

In order to chalk out a viable business strategy, Chipotle discarded its former co-CEO model and recently appointed former Yum! Brands' (NYSE:YUM) executive Brian Niccol as the CEO. Niccol’s expertise in restaurant operations, digital technologies and branding has significantly helped Chipotle in first-quarter earnings. Shares jumped 10.7% in after-hours trading on Apr 25. The company’s shares have also rallied 48.2% in the past six months, outperforming the industry’s gain of 1.5%.

Let’s have a detailed look at the quarter’s results.

Revenues and Comparable Restaurant Sales

Quarterly revenues of $1.15 billion met the consensus estimate but grew 7.4% year over year. The revenue growth is primarily attributable to improvement in comps and restaurant openings. The company opened 35 new restaurants in the first quarter and closed two restaurants, bringing the total restaurant count to 2,441.

Comps in the quarter increased 2.2%, which include an underlying comp sales growth of 2.7% and 50 basis points (bps) impact related to deferred revenues, recognized during the year-ago quarter due to the Chiptopia Summer Rewards program. Comps were driven by an increase in average check, including 4.9% benefit from menu price increase, partially offset by fewer transactions and resistance that have been less than 20%. The check average also benefited from customers, adding queso to their orders, which added about 200 bps.

Costs, Operating Highlights & Net Income

Food costs, as a percentage of revenues, decreased 140 bps to 32.4% driven by cost savings in paper and packaging usage, as well as higher menu prices, partially offset by higher costs associated with preservative-free tortillas.

General and administrative expenses came in at 6.7% of total revenues, reflecting an increase of 20 bps year over year, due to rise in headcount and higher bonus expenses. However, the increases were partially offset by lower stock-based compensation expense as a result of forfeitures of stock during the quarter.

Restaurant-level operating margin was 19.5%, up 180 bps from 17.7% in the year-ago quarter. The upside was primarily driven by lower marketing and promotional expenses, and comps growth, partially offset by wage inflation at the crew and manager level.

Net income in the quarter was $59.4 million, up from $46.1 million in the prior-year quarter.

Balance Sheet

Cash and cash equivalents as of Mar 31, 2018 were $231.8 million, compared with $184.6 million as of Dec 31, 2017.

Inventory totaled $17.4 million as of Mar 31, 2018, down from $19.9 million as of Dec 31, 2017. Goodwill, as a percentage of total assets, was 1.04% at the end of the first quarter compared with 1.07% at the end of 2017.

During the first quarter, the company’s board of directors approved an investment of up to an additional $100 million, exclusive of commissions, to repurchase shares of the company’s common stock.

2018 Outlook

For 2018, management continues to expect comps growth in low single digits and launch 130-150 restaurants.

Effective tax rate is estimated in the range of 32.5-33.5% (up from the previously guided range of 30-31%), including an underlying effective tax rate of about 29% in the second and third quarters, and up to 38.5% high in the fourth quarter as a result of an additional anticipated write-off of deferred tax assets associated with stock-based compensation awards.

Zacks Rank & Peer Releases

Chipotle carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Darden (NYSE:DRI) reported mixed third-quarter fiscal 2018 results, wherein earnings surpassed the Zacks Consensus Estimate while revenues lagged the same. Adjusted earnings of $1.71 per share increased 29.5% year over year on the back of higher revenues.

Restaurant Brands’ (NYSE:QSR) first-quarter 2018 earnings and revenues surpassed the Zacks Consensus Estimate. Earnings under the previous accounting standard came in at 67 cents, growing 86.1% year over year.

More Stock News: This Is Bigger than the iPhone!

It could become the mother of all technological revolutions. Apple (NASDAQ:AAPL) sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.

Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.

Click here for the 6 trades >>