It's not often that a stock can beat expectations on both earnings and revenue and still drop 3%. And all that on a day when the market is up!
That's exactly what happened to Chipotle (NYSE: CMG) today, after earnings came out last night. I suggested in my earnings preview that the burrito roller's shares may have gotten ahead of themselves recently. The stock gained nearly 40% in the past four months, and its P/E jumped from 50 to more than 60 on virtually no news out of the company itself, instead riding the broad market's bullish trend and benefiting from factors outside its control, such as a mild winter and the "pink slime" scare. A well-received ad during the Grammy Awards also may have helped.
Investors seem to have come back to their senses following the report, realizing that even a stock like Chipotle is subject to the laws of gravity. After all, this is a restaurant chain growing methodically at rates around 25%, not a tech company that can drop a groundbreaking gadget that doubles sales in a heartbeat. With such a high P/E on the stock, investors should expect stock growth to keep pace with earnings growth.
On to the numbers
The earnings report itself was a gem. Chipotle posted earnings per share of $1.97, $0.04 ahead of analyst expectations, and beat revenue estimates by $10 million, with $641 million in sales for the quarter. The top-line increase represented a 26% jump from the quarter a year ago, while net income improved by a whopping 35% to $62.7 million. Same-store sales also rose 12.7%, and restaurant-level operating margins improved 2.2 percentage points to 27.4%.
Management acknowledged that warm weather helped boost sales during the generally slow first quarter, estimating the weather-related bump to be between 1% and 2% and adding that the trend has continued into April. A price increase last year also boosted same-store sales.
On the call, founder/co-CEO Steve Ells touted the company's award-winning two-minute "Back to the Start" ad aired during the Grammys, saying the spot prompted 22,000 tweets immediately after it aired and yielded more than 33 million impressions on Twitter in the days following its release. Ells called the short film just one part of a marketing strategy geared at "inviting people on a journey to a more sustainable world" and said it's one way that Chipotle differentiates itself from McDonald's (NYSE: MCD), Wendy's (Nasdaq: WEN), and Yum! Brands (NYSE: YUM), which use advertising primarily to communicate the latest discount or newest menu item. Ells sees his company's marketing as a way of creating a more loyal customer rather than advertising "at them."
Management also emphasized the company's unique human-resources strategy and new processes installed to enhance its employee service. Since it doesn't franchise as its aforementioned competitors do, Chipotle can adopt more of a hands-on approach to its hiring and promotional process, which I see as a competitive advantage over its rivals. Fully 98% of its current managers started out as crew members, and the ability to move up through the organization helps create an aspirational and high-performing culture among the employees.
Co-CEO Monty Moran also underscored how the quality of employee performance has helped improve throughput, saying the metric that measures how fast the company moves customers through the line had reached its best figure for this time of year. Improving throughput will continue to be important for Chipotle, since that will ensure increasing same-store sales by squeezing in more transactions during peak hours, and it will enhance the customer experience and encourage customers to visit the restaurant more often since they won't have to wait as long.
For the quarter, the company opened 32 more stores, bringing the grand total to 1,262. The company appears to be on track abroad, with three more U.K. openings planned this year as well its first Paris restaurant expected this spring. A second Shophouse location is also planned for Washington, D.C., in late fall/early winter.
Plenty of room for seconds
The chain maintained its outlook for 2012, with 155-165 new restaurants expected and same-store sales increases in the mid-single digits. While comps were in the double digits in the first quarter, they should take a hit later in the year, when the benefit of 2011's price increase fades away. For the second quarter, analysts are expecting a 37% bump in EPS to $2.25 as well as a 23% jump in revenue.
I continue to remain bullish on Chipotle, and I'll reaffirm the positive CAPScall I made earlier. While its high multiple might scare some investors away, the company is firing on all cylinders, it has plenty of growth opportunities in its future, and it continues to separate itself from the competition. There are plenty of reasons for Chipotle to warrant that premium.
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