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July 2007



Chipotle 2Q 2007 Earnings Preview

July 22, 2007 – Comments (3)

Chipotle will be releasing 2Q 2007 results on July 31 after the market close. I thought I'd do a little preview/analysis and see if we can come up with a good estimate. First, let's do a little review.

Chipotle has reported quarterly results six times since going public in January 2006, and every time they have smashed estimates. Here's what it has looked like:

4Q 2005 1Q 2006 2Q 2006 3Q 2006 4Q 2006 1Q 2007

EPS Est 0.11 0.12 0.25 0.27 0.28 0.32
EPS Actual 0.16 0.26 0.33 0.36 0.33 0.38
Difference 0.05 0.14 0.08 0.09 0.05 0.06
Surprise % 45.5% 116.7% 32.0% 33.3% 17.9% 18.8%

The most recent quarter (1Q 2007) was especially impressive to me. The overall restaurant industry was feeling a lot of pressure this winter primarily because of rough weather; analysts actually lowered their estimates for Chipotle and were expecting a pretty big dip in growth and margins. They were expecting the profit margin to fall down well below 5%. Chipotle reported a profit margin of 5.3%. When many other restaurants were reported little to negative growth, Chipotle was able to strengthen margins and keep up very strong growth in sales and earnings. In other words, this is a one-of-a-kind business that has been able to grow at a remarkable pace while many other restaurants hardly got anywhere.

For the upcoming 2Q 2007, the 17 analysts following Chipotle are expecting an average EPS of $0.45 (low estimate $0.42; high estimate $0.48) on revenue of $262.91 million. This means they are expecting the profit margin to come in around approximately 5.5%. I think this is a low expectation for the profit margin that Chipotle should easily beat. The 2Q is a very busy time for Chipotle, and this year brought favorable weather (at least much more favorable than the weather in the 1Q) and Chipotle has also made some adjustments to speed up the ordering process. The main downward pressure people see impacting Chipotle negatively is commodity prices. Personally, I don't think Chipotle will be that impacted from higher prices. If they really did feel a pinch, I'm confident that management would have raised some prices on the menu or found ways to improve efficiency. It's not like the past couple quarters have been a walk in the park with commodity prices, either. So, I think the worries about high commodity prices have been overblown; Chipotle will work through it if they do indeed feel a good deal of pressure from it. The company has a very healthy balance sheet and this management team has done a terrific job improving efficiency. Management has said they expect higher pressure from commodity prices, so I'm confident they have and will continue to make the necessary adjustments. Last quarter they increased menu prices and I'm sure they could continue to do so without losing customers.

Analysts are expecting revenue growth of 28.3%. I'm believing sales will be able to grow at a clip closer to 29% because of more favorable weather, the moves to speed up lines, and the fact that this is a strong time for restaurants in general. So, I'm expecting revenue to come in at $264,000,000. The difficult part is coming up with a reasonable profit margin to expect. I'm confident that at least some of the measures to increase efficiency will have come into play by now, and if commodity prices did put pressure on the company, I expect menu price increases will offset the extra cost. I'm expecting Chipotle to report a profit margin of 6%. In the same quarter last year sales were up 31.1% and the EPS grew 57%. At this time last year the profit margin was 5.3%.

$264,000,000 in revenue with a 6% profit margin equals $15,840,000 in net income. Let's assume that the share count will increase to 33,100,000. This translates into an EPS of $0.48, the high end of analyst expectations, making for another beating of estimates. To tell the truth, I wouldn't be surprised if we saw the EPS come in at $0.50, because I don't believe Chipotle is experiencing as much pricing pressure as many analysts are thinking. But I'm sticking with a little more cautious estimate just in case analysts actually have their heads in the right place this time. If the EPS were to come in at $0.48, the TTM EPS would stand at $1.54. Peg a P/E of 55 on that and the B shares would be priced at $84.70.

Anyway, I'm expecting another estimate-beating quarter from Chipotle. I love how management is executing and think they've handled the pressure felt by the restaurant industry very well. I continue to have a lot of faith in management and think Chipotle has a great future ahead of it.  [more]

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