Chipotle investors might want one of these after tomorrow's sell-off. Source: Chipotle.
Chipotle Mexican Grill (CMG +1.44%) met or beat most analyst estimates in its fourth-quarter and full-year reports. However, it looks as if conservative guidance for 2015 has Mister Market spooked, with shares trading down about 6% as of this writing.
The highlights:
- Revenue rose 27.8% for the year.
- Earnings per share of $14.13 marked a 35% increase.
- Restaurant-level operating margin rose 60 basis points.
Let's take a closer look at the details. While the market may be reacting negatively, there's probably more to the story.
The end of insane comps?
Chipotle has reported a full year of crazy-good comparable restaurant sales, finishing the year with comps of 16.1% in the fourth quarter and 16.8% for the full year.
However, the company announced -- actually, it just repeated what it announced last October -- that comps growth for 2015 will fall to the "low to mid-single digits." While the market is responding to this "news" by selling off, I want to repeat that this is the same guidance that Chipotle management gave us last October, when it reported earnings after the third quarter.
Co-CEO Steve Ells made it clear on that call that the company might be making a conservative call when it was evaluated after the fact, but at the time it could only make the projections based on the data available. Only time will tell whether it was a sandbagging effort, or if Ells' conservative projections made sense.
Core Chipotle expansion continues
With a store count of 1,783 at the end of the year, the company opened 192 restaurants in the year and is projecting 190 to 205 new Chipotle locations in 2015. New restaurants will drive the vast majority of sales growth in 2015, versus the power of 2014's comps, which were a combination of price and traffic increases in existing stores.
However, the company's two still-in-development restaurant brands, Pizzeria Locale and ShopHouse, remain concepts, with only a handful of locations. Chipotle management seems content to further develop the concepts before investing big dollars into a widescale rollout.
At some point down the road, these two concepts could become drivers of growth, but -- as has been the case since ShopHouse was introduced two years ago -- Chipotle remains the focus.
Where's the beef?
Higher beef and dairy costs -- even after the price increases this summer -- increased food costs as a percentage of revenue. Barring an increase in the menu price of barbacoa and steak items, this looks as if it will be the case in 2015.
According to almost every major protein producer, there's likely to be a shortage of beef in 2015, with beef cattle herds at some of the smallest levels in the U.S. in years. If Chipotle holds the line on prices, it's possible that food costs as a percentage of sales could increase again this year.
Operating margins at the store level still increased last year, largely because of what management called "favorable sales leverage," which is code for selling more high-margin items.
Looking ahead
It's not clear what the stock will do over the next few days, as investors further digest the earnings release and speculate on what it means for the stock. Investors -- and forgive me this constant refrain -- are best suited by keeping the long term at the forefront, because there will always be uncertainty in the short term.
Chipotle management continues to run an excellent business that has established itself firmly as a consumer favorite. Factor in a strong -- and strengthening -- economy, and the long-term trends are in Chipotle's favor.
