Will Chipotle’s EBIT Margins Expand in 2Q16?

Despite owning all of its restaurants, Chipotle Mexican Grill (CMG) enjoyed higher margins than its peers until 3Q15 due to its superior business model. However, food safety issues struck the company in October 2015, leading to a decline in same-store sales growth and EBIT margins. In 1Q16, the company posted EBIT margins of -5.6%.

In 2Q16, analysts expect Chipotle’s EBIT margins to decline from 19% in 2Q15 to 4.4%. Enhanced food safety measures should increase the rejection of raw material, which in turn would hike sales costs. Also, the increase in food safety measures increases labor requirements. Along with increased wages, this change is expected to increase labor expenses. These increased expenses, together with sales deleveraging due to negative same-store sales growth, could have compelled analysts to lower Chipotle’s 2Q16 EBIT margins. However, the current estimates show improvement from 1Q16 EBIT margins of -5.6%.

In 2Q16, Chipotle’s peers Panera Bread (PNRA), Shake Shack (SHAK), and Brinker International (EAT) are expected to post EBIT margins of 9.6%, 12.9%, and 12.2%, respectively, compared to their 2Q15 EBIT margins of 10.1%, 12.8%, and 12.1%, respectively.

With improvements in same-store sales growth, analysts are expecting Chipotle to post EBIT margins of 9.5%, 10.8%, and 7.3% in 3Q16, 4Q16, and 1Q17, respectively, compared to 19.3%, 10.4%, and -5.6% in 3Q15, 4Q15, and 1Q16, respectively.

In the next part of this series, we’ll look at Chipotle’s earnings per share expectations.