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Takeaway: Earnings miss, but strong revenue growth, traffic growth, and same-store sales acceleration push CMG higher.

We continue to believe that Chipotle is one of the best positioned growth companies in the restaurant industry.  Revenues and same-store sales beat by 80 bps and 150 bps, respectively, which helps allay any concerns over the earnings miss.  All told, the company reported a fairly strong 3Q in the midst of an unfavorable environment.  While rising food costs are a point of contention, we believe management will be able to appropriately offset this headwind in the coming quarters with minimal price increases. 

Chipotle, is one of the best managed restaurant companies in the space and we are confident that they will be able to mitigate any oncoming margin pressure.  Last quarter, we wrote that CMG was well-positioned for the balance of the year and, after reviewing 3Q13 results, we have little reason to believe this will not be the case.  For now, we expect 4Q to be another strong quarter.

What We Liked

  • Revenues: $826.9m, beat consensus estimates by 80 bps, +18% y/y
  • Same-store sales: +6.2%, beat consensus estimates by 150 bps, +70 bps sequentially
  • Traffic was positive in what was a forgettable quarter for the restaurant industry
  • CMG transactions accelerated sequentially during the year from 3% in 1Q13 to 4.5% 2Q13 to 6.2% in 3Q13 and positive trends will continue in 4Q
  • $103m left on their share buyback program
  • Targeting 180-195 new restaurant openings in 2014
  • Opening sales volumes are very strong – $1.6-1.7m
  • Plan to take 3-5% price in 2014, to offset any food inflation and the cost of removing GMOs from their menu; the timing of the price increase is unknown, although management hinted that it would be mid-2014
  • They continue to have a strong operational focus, as throughput increased by 5 transactions during the peak day hour in the quarter
  • It appears their unique marketing efforts, including the “Skillfully Made” campaign, are resonating with consumers
  • Sofritas have been impressive and should bring in incremental customers – they account for over 4% of sales in the restaurants that carry it
  • They continue to roll out the catering program, which has notable potential
  • They are not rushing their international development and will not meaningfully accelerate growth until they have properly “built the brand”
  • Likewise, they are not rushing the development of their Shop House brand, where early results have been encouraging

What We Didn’t Like

  • EPS of $2.66, missed consensus by 433 bps, +17.2% y/y
  • Food costs were 33.6%, +100 bps y/y
  • Restaurant level operating margins were 26.8%, -60 bps y/y
  • Operating margins were 16.6%, -20 bps y/y
  • Same-store sales decelerated -130 bps sequentially on a two-year basis
  • Guided to low single-digit same-store sales in 2014 – although this excludes any menu price increases
  • Guided to food costs in the 33.5-34% range for the next several quarters, excluding the cost of removing GMOs and any potential price increase  

Howard Penney

Managing Director