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Can Chipotle Mexican Grill Bounce Back in 3Q17?

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Part 3
Can Chipotle Mexican Grill Bounce Back in 3Q17? PART 3 OF 6

Why Analysts Expect Chipotle’s Earnings Margin to Rise in 3Q17

3Q17 expectations

In fiscal 3Q17, analysts are expecting Chipotle Mexican Grill’s (CMG) EBIT (earnings before interest and tax) margin to rise 7.4% from 0.90% in 3Q16. The expansion is expected to be driven by lower cost of sales, a decline in SG&A (selling, general, and administrative) expenses, and a sales leverage from positive SSSG (same-store sales growth).

Why Analysts Expect Chipotle&#8217;s Earnings Margin to Rise in 3Q17

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Analysts expect the cost of sales in 3Q17 to decline due to improved food handling procedures and less waste. However, some of the declines in the cost of sales are expected to be offset by the rise in avocado prices. In September 2017, the American Restaurant Association said the price of avocados has increased 125.0% since the beginning of 2017.

SG&A expenses are expected to decline from 15.1% of total sales to 6.8% due to a sales leverage from positive SSSG, lower labor expenses, and management’s initiatives to lower its underlying G&A (general and administrative) expenses. Analysts expect better scheduling and deployment of labor to offset the rise in wages, resulting in a decline in labor expenses.

Peer comparisons

During the same period, Shake Shack (SHAK) and The Cheesecake Factory (CAKE) are expected to post EBIT margins of 10.6% and 7.2%, respectively. The EBIT margins for these companies were 12.3% and 8.9%, respectively, in 3Q16.

Outlook

For the next four quarters, analysts expect Chipotle’s EBIT margin to be 8.6% compared to 5.1% in the corresponding four quarters of the previous year. The expansion is expected to be driven by favorable SSSG and lower cost of sales due to less waste.

Next, let’s look at analysts’ EPS (earnings per share) estimates for 3Q17.

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