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What to Expect from Chipotle’s 2Q17 Earnings

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Part 3
What to Expect from Chipotle’s 2Q17 Earnings PART 3 OF 6

Why Analysts Expect Chipotle’s EBIT Margins to Rise in 2Q17

2Q17 estimates

Analysts expect Chipotle Mexican Grill (CMG) to post EBIT1 of $105.3 million in 2Q17, which represents an EBIT margin of 8.9%. In 2Q16, the company had posted an EBIT margin of 4.1%.

Why Analysts Expect Chipotle&#8217;s EBIT Margins to Rise in 2Q17

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Factors that could expand Chipotle’s margins

The improvement in food handling procedures, lower waste from enhanced food safety procedures, and sales leverage from positive same-store sales growth (or SSSG) are expected to drive Chipotle’s 2Q17 margins.

Due to improvement in food handling procedures and less waste, analysts expect the company’s cost of sales to fall sharply from 84.5% of total sales in 2Q16 to 21.6%. However, some of the expansion in EBIT margin is expected to be offset by the rise in SG&A (selling, general, and administrative) expenses. 

In 2Q17, analysts expect Chipotle’s SG&A expenses to increase from 7.1% to 7.3%. The rise in investments on the implementation of technological advancements, the rise in labor wages, and an increase in marketing and promotional spending are expected to boost SG&A expenses.

Peers

During the same period, Shake Shack (SHAK) and Panera Bread (PNRA) are expected to post EBIT margins of 11.8% and 9.4%, respectively. In 2Q16, the companies had posted EBIT margins of 13.4% and 9.7%, respectively.

Outlook

For the next four quarters, analysts expect Chipotle’s EBIT margins to reach 9.4% compared to 3.7% in the corresponding quarters of 2016. The expansion of its EBIT margin is expected to be driven by sales leverage from positive SSSG and lower cost of sales expenses.

Next, we’ll look at Chipotle’s 2Q17 EPS estimates.

  1. earnings before interest and tax
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