What to Expect from Chipotle Mexican Grill in Q4

Chipotle Mexican Grill (NYSE:CMG) will report its fourth-quarter earnings after the market closes on February 4. For the quarter, analysts expect the company’s revenue and EPS to rise. Let’s look at analysts’ expectations in detail.

Analysts’ revenue expectations

For the fourth quarter, analysts expect Chipotle to report revenue of $1.40 billion—a rise of 14.2% from $1.22 billion in the fourth quarter of 2018. The positive SSSG (same-store sales growth) and opening new restaurants could drive the company’s revenue in the fourth quarter. By the end of the third quarter, Chipotle operated 2,546 restaurants—a rise of 55 units in the first three quarters of 2019. Along with these restaurants, the restaurants that opened in the fourth quarter of 2019 could drive the company’s revenue.

Chipotle’s same-store sales growth

Chipotle’s management projects its SSSG for the fourth quarter to be in the high single-digit range compared to 11% in the third quarter due to tough comparisons. In the same quarter of the previous year, the company reported an SSSG of 6.1%.

Chipotle is focusing on expanding its delivery services, implementing digital advancements, menu innovation, and various marketing and promotional programs to drive its SSSG.

In the third quarter, digital sales generated $257 million or 18.3% of the company’s total revenue. The company’s digital revenue increased by 88% YoY. So, the contribution of digital sales is on the rise. We expect that reducing the friction between the process, enhancing customers’ digital experience, and the expanding delivery could drive the company’s digital sales in the fourth quarter. By the end of the third quarter, the company’s management announced that it installed digitized make-lines in all of the relevant restaurants. Also, the company introduced a delivery service in 97% of its restaurants. Chipotle launched a loyalty program, “Chipotle Rewards,” in March 2019. By the end of the third quarter, the company had 7 million members enrolled in the program.

EBIT could improve

Analysts expect Chipotle to report an EBIT of $102.5 million, which represents an EBIT margin of 7.3%. In the same quarter of the previous year, the company’s EBIT margin was 5.1%. Analysts expect the improved gross margin and lower SG&A expenses as a percentage of revenue to drive its EBIT.

Chipotle’s management expects the company’s food and paper costs to be in the low to mid 33%—an increase from 32.9% in the same quarter of the previous year. They expect that higher costs associated with the introduction of a new menu item, Carne Asada, could offset the positive effects of lower avocado prices and drive the company’s food and paper costs. Management expects the labor expenses to improve from 27.3% to a high 26%. Chipotle’s management also announced that its marketing and promotional costs could go above 4% in the fourth quarter. The promotional costs could rise due to the marketing investment associated with the launch of Carne Asada and other promotions.

Chipotle’s EPS to rise close to 60%

Analysts expect Chipotle to report an EPS of $2.74, which represents an increase of 59.6% from $1.72 in the fourth quarter of 2018. The revenue growth, expanded EBIT margin, and lower effective tax rate could drive Chipotle’s EPS. For the fourth quarter, analysts expect Chipotle’s effective tax rate to be 26.9% compared to 27.4% in the same quarter of the previous year.

Analysts’ recommendations

Overall, analysts favor a “hold” rating for Chipotle. Among the 35 analysts that follow Chipotle, 54.3% recommend a “hold,” 42.9% recommend a “buy,” and 2.9% recommend a “sell.” As of Wednesday, analysts’ consensus target price was $891.44, which implies a 12-month return potential of 1.4%.

Since the beginning of January, Oppenheimer and UBS have upgraded the stock. Meanwhile, several analysts have raised their target prices. On Monday, UBS upgraded the stock to “neutral” and increased its target price from $690 to $800. Earlier, on January 9, Oppenheimer upgraded the stock to “perform” from “underperform.” In January, Stifel raised its target price twice. On January 9, Stifel increased its target price from $750 to $800. On January 28, Stifel raised its target price to $820.

The other analysts that increased Chipotle’s target price in January include the following:

  • Cowen increased its target price from $970 to $975.
  • SunTrust Robinson increased its target price from $900 to $940.
  • Tesley Advisory Group increased its target price from $800 to $900.
  • BTIG increased its target price from $890 to $1,010.

Chipotle’s stock performance

As of January 29, Chipotle was trading at $879.3, which represents a rise of 5.8% since the company reported its third-quarter earnings on October 22. Although Chipotle reported an impressive third-quarter performance, its stock fell to a low of $728 on November 11. During the third-quarter earnings call, the company’s management announced a delay in the construction of Chipotlane. As a result, the company could fall slightly below the new restaurant opening expectation of 140–155 units. Chipotle stock might have fallen due to the announcement. Since then, the stock has increased by 20.8%. The company’s stock price might have risen due to positive commentary from analysts and upgrades.

Since the beginning of this year, Chipotle has returned 5.0%. During the same period, Shake Shack (NYSE:SHAK) and McDonald’s (NYSE:MCD) have returned 14.3% and 8.5%. However, Starbucks (NASDAQ:SBUX) has lost 1.4% of its stock value YTD.

Valuation multiple

As of January 29, Chipotle was trading at a forward PE ratio 48.8x. However, the company was trading at 49.4x before the announcement of its third-quarter earnings. Although the stock has risen since the company reported its third-quarter earnings, its forward PE ratio has declined. The company’s valuation multiple might have fallen due to analysts’ increased EPS estimates. Meanwhile, Shake Shack, McDonald’s, and Starbucks were trading at forward PE ratios of 113.8x, 25.3x, and 27.3x, on the same day, respectively.

Chipotle was trading at 48.7x analysts’ 2020 EPS estimate of $18.05 and at 38.5x analysts’ 2021 EPS estimate of $22.83. They expect the company’s EPS to rise by 29.3% in 2020 and 26.5% in 2021.