What Drove Chipotle’s Earnings in Q4?

Yesterday, Chipotle Mexican Grill (NYSE:CMG) reported its fourth-quarter earnings after the market closed. For the quarter, the company reported an adjusted EPS of $2.86 on revenues of $1.44 billion. The company beat analysts’ EPS estimate of $2.75 and revenue estimate of $1.40 billion. Chipotle also reported an impressive SSSG of 13.4% for the quarter compared to analysts’ expectations of 9.5%. The company’s stock rose more than 1.5% in the after-market hours of trading.

Chipotle’s revenue growth

During the fourth quarter, Chipotle’s revenue rose 17.6% from $1.23 billion in the fourth quarter of 2018. The positive SSSG (same-store sales growth) and the net addition of new restaurants in the last four quarters drove the company’s revenue during the quarter. For the quarter, Chipotle’s SSSG came in at 13.4% due to an increase in the check-size and transactions. During the quarter, the company’s transactions grew by 8%, while its average check-size increased by 5.4%. Chipotle’s digital sales grew by 78.3% on a YoY basis to form 19.6% of the company’s total revenue.

By the end of the fourth quarter, Chipotle operated 2,622 restaurants—a rise of 131 units from 2,004 restaurants at the end of 2018. In the fourth quarter, the company opened 80 stores and closed three units. Among the 80 new restaurants, 46 restaurants included Chipotlanes, which increased the overall restaurants with Chipotlanes to 66 units.

Expanded EBIT margin

Chipotle’s EBIT margin expanded in the fourth quarter. For the quarter, the company reported an EBIT of $498.3 million, which represents an EBIT margin of 8.9%. The EBIT margin improved by 3.8% from 5.1% in the same quarter of the previous year. During the period, the company’s food, beverage, and packaging costs fell by 0.1% to 33.1% of the total revenue. Higher menu prices and favorable avocado prices lowered the company’s food expenses, which was partially offset by higher costs related to several other ingredients. The company’s labor and occupancy costs fell by 0.6% and 0.7% as a percentage of the total revenue, respectively. Also, during the quarter, the company’s general and administrative expenses and depreciation and amortization costs didn’t drive the company’s EBIT margin.

Chipotle’s EPS grew over 66%

In the fourth quarter, Chipotle reported a diluted EPS of $2.55. However, removing one-time or special items, the company’s adjusted EPS came in at $2.86. The adjusted EPS increased 66.3% from $1.72 in the fourth quarter of 2018. The revenue growth, expanded EBIT margin, and lower interest expenses drove the company’s EPS. A higher adjusted effective tax rate and an increased number of outstanding shares offset some of the gains in the EPS. For the quarter, the company’s effective tax rate was 27.0% compared to 22.4% in the same quarter of the previous year.

Outlook

For 2020, Chipotle’s management expects to open 150–165 new restaurants. More than half of the restaurants will have Chipotlanes. The company’s management also expects its SSSG to come at the mid-single digits. They expect the company’s effective tax rate to be between 26% and 29%.

Analysts’ recommendations

Chipotle’s impressive fourth-quarter earnings prompted many analysts to raise their target prices. After Chipotle reported its earnings, Piper Sandler raised its target price from $904 to $986, while Evercore ISI increased its target price from $960 to $980. Meanwhile, RBC hiked its target price from $890 to $920. Overall, analysts have a target price of $920.88, which implies a 12-month return potential of 4.1%. As of February 4, 34 analysts covered Chipotle. Among the analysts, 44.1% favor a “buy,” 52.9% favor a “hold,” and 2.9% favor a “sell.”

Stock performance

Investors’ optimism about Chipotle’s fourth-quarter earnings caused Chipotle’s stock price to hit an all-time high of $890.17 yesterday before closing the day at $884.82—a rise of 5.7% since the beginning of this year. Last year, Chipotle delivered excellent returns of 93.9% due to its strong performance during the period. This year, McDonald’s (NYSE:MCD), Shake Shack (NYSE:SHAK), and Starbucks (NASDAQ:SBUX) have returned 8.6%, 17.3%, and 0.5%, respectively. Last month, McDonald’s and Starbucks reported their earnings. To learn more about McDonald’s fourth-quarter performance, read McDonald’s Beats Analysts’ Q4 Estimates.