Chipotle Earnings: An Early Look

With hundreds of companies having already reported quarterly results, we're now in the heart of earnings season. The key to making smart investment decisions with stocks releasing their quarter reports is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed kneejerk reaction to news that turns out to be exactly the wrong move.

Let's turn to Chipotle Mexican Grill (CMG 6.33%). The revolutionary restaurant chain helped pioneer the limited-menu concept, taking just a few specialties and combining them with quality ingredients to attract a huge fan base. Let's take an early look at what's been happening with Chipotle Mexican Grill over the past quarter and what we're likely to see in its quarterly report Tuesday.

Stats on Chipotle

Source: Yahoo! Finance.

Can Chipotle feed shareholders well?
Analysts responded unfavorably to Chipotle's earnings miss last quarter and ratcheted down their estimates accordingly. With earnings-per-share guesses down $0.13 over the past three months, Chipotle has a lower growth bar to overcome -- even though Chipotle's share price has bounced back considerably from its downturn last summer, rising 22% since early November.

What's surprising is how well Chipotle weathered the negative news from its preliminary earnings release in mid-January, in which it said profit would rise only between 6% and 9% for the quarter. Even though it posted 3.8% same-store sales and opened 60 new restaurant locations, high food costs led to margin compression that hurt Chipotle's bottom line.

That's consistent with higher food costs that other restaurant chains have seen. Buffalo Wild Wings (BWLD), for example, has had to deal with wing prices that have risen 70% from year-ago levels. Yet commodity-cost management is possible, as Panera Bread (PNRA) has shown with its network of bakeries providing dough and other ingredients to franchisees in a maximally efficient manner.

Competition in the Tex-Mex space has also been heating up. Yum! Brands (YUM -0.18%) and its Taco Bell franchise have taken aim at Chipotle customers, with investor David Einhorn asserting that Taco Bell has done an excellent job poaching from its rival. Meanwhile, full-casual chain Chuy's (CHUY -1.80%) has rocketed higher since its summer IPO, doubling in price as the small, geographically focused Tex-Mex upstart seeks to move into the national market.

But the company is taking steps to differentiate itself. Its ShopHouse Asian Kitchen rollout has gone reasonably well and could lead to long-term future growth, and a new catering service in Colorado will spearhead what Chipotle expects to become a nationwide offering later this year. Moreover, its pro-social stance earns it a strong following among many sustainability-conscious customers who aren't likely to gravitate to competitors.

With most of the big numbers coming out in the preliminary report, look to this release as a way to get a better handle on future strategy. Barring any surprises compared with the preliminary figures, Chipotle's best chance to keep rising will be to give investors a compelling story for the coming months and years.

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