Why Is Chipotle (CMG) Down 1.6% Since Last Earnings Report?

It has been about a month since the last earnings report for Chipotle Mexican Grill (CMG). Shares have lost about 1.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Chipotle due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Chipotle Q3 Earnings & Revenues Surpass Estimates

Chipotle Mexican Grill reported third-quarter 2019 results, wherein both earnings and revenues surpassed the respective Zacks Consensus Estimate. While the bottom line beat the consensus estimates for the eighth straight quarter, the top line came ahead of the same for the fourth consecutive quarter.

The company’s adjusted earnings of $3.82 per share surpassed the Zacks Consensus Estimate of $3.20. The bottom line also improved 76.9% from the year-ago quarter, driven by increased revenues and strong operating margins.

Chipotle’s increased focus on augmenting customer experience by introducing food-safety programs, various sales-building initiatives and greater digital innovation resulted in revenue growth in the third quarter.

Revenues & Comparable Restaurant Sales

Quarterly revenues of $1.4 billion surpassed the consensus estimates by 1.8% and improved 14.6% year over year. This upside is primarily attributable to improvement in comps and restaurant openings. In the quarter under review, Chipotle opened 25 restaurants and closed one, taking the total restaurant count to 2,546.

Comps in the third quarter rose 11%, driven by a rise of 7.5% in comparable restaurant transactions and an increase of 3.5% in average check.

Costs, Operating Highlights & Net Income

Food, beverage and packaging costs, as a percentage of revenues, decreased 20 basis points (bps) to 33.2% due to benefit of menu price increases, marginally negated by higher costs of ingredients.

Restaurant-level operating margin was 20.8%, up 210 bps from 18.7% in the year-ago quarter. This upside was primarily driven by comps growth, partially offset by wage inflation, increased food costs, and marketing and delivery expenses.

Net income in the reported quarter amounted to $98.6 million, up from $38.2 million in the prior-year quarter.

Balance Sheet

Cash and cash equivalents as of Sep 30, 2019, were $386.6 million compared with $250 million as of Dec 31, 2018.

Inventory totaled $23.9 million as of Sep 30, 2019, down from $21.6 million as of Dec 31, 2018. Goodwill, as a percentage of total assets, was 0.4% at the end of the third quarter compared with 1% at the end of 2018.

2019 Outlook

For 2019, management expects comps to grow in a high-single digit. The company estimates effective tax rate between 26% and 29%. It still expects to inaugurate 140-155 restaurants in 2019.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -9.16% due to these changes.

VGM Scores

At this time, Chipotle has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Chipotle has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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