Chipotle Seeks to Turn Its Earnings Around

On Thursday, Chipotle Mexican Grill (CMG 6.33%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings 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, knee-jerk reaction to news that turns out to be exactly the wrong move.

Chipotle has taken the fast-food industry by storm with its healthy fare. But even its growth has limits, and Chipotle has also faced some challenges from tough conditions in the restaurant industry generally. Let's take an early look at what's been happening with Chipotle over the past quarter and what we're likely to see in its quarterly report.

Stats on Chipotle

Source: Yahoo! Finance.

Will Chipotle's burritos bounce back this quarter?
Analysts have gotten a bit more pessimistic about Chipotle's earnings prospects over the past few months, as they've cut both first-quarter and full-year 2013 earnings-per-share estimates by $0.04 per share. But the burrito maker's shares have bounced back nevertheless, rising nearly 15% since early January.

Chipotle owes its success to making high-quality food that caters to the trend toward healthier eating. Even as more traditional casual eateries have jumped onto the health-conscious bandwagon, Chipotle has reaped the benefits with its well-known reputation for healthy fare.

Yet those healthy offerings come at a cost. Chipotle has faced higher ingredient prices, and that has had an impact on the company's margins. Healthy-eating rival Panera Bread (PNRA) has been able to take steps to keep its costs down, such as making its bread dough internally. For Chipotle, though, the primary option it has to keep its margins up is to pass on higher costs through to customers via menu price hikes. Given that Chipotle's same-store sales growth has slowed to a rate that's below Panera's, the former hasn't had the flexibility to make customers eat those higher costs entirely.

Moreover, Chipotle has seen competition from what may seem like an unlikely source: Taco Bell. The Yum! Brands (YUM -0.18%) unit's focus on its Doritos Locos Tacos line may not appeal to the same health-conscious crowd as Chipotle's, but it has some analysts thinking that Chipotle's failure to raise prices may stem from its not wanting to lose lower-end customers to Taco Bell.

In Chipotle's earnings report, be sure to pay attention to two things: ongoing cost trends and the company's strategic vision for its ShopHouse Asian Kitchen expansion. Measured growth has been the company's way of doing business, but with its current challenges, Chipotle may start taking more aggressive steps to assert its leadership in fast-casual dining.

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