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Will Chipotle Meet Analysts’ Q1 Expectations?

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Apr. 15 2020, Published 11:24 a.m. ET

The COVID-19 outbreak has created havoc in global financial markets. Chipotle Mexican Grill (NYSE:CMG) stock fell to a low of $415 on March 15 due to weakness in broader equity markets. However, the company has made a significant recovery from those levels. As of April 14, Chipotle was trading at $785.33—a rise of 89.2% from its March 15 lows. The stock price rose due to optimism about the clearance of a $2 trillion stimulus package and the slowing COVID-19 infection rate. I think the company’s first-quarter performance and management’s commentary during the earnings call will decide the stock price momentum. Chipotle will likely report its first-quarter earnings after the market closes on April 21. Let’s look at analysts’ revenue expectations for the first quarter.

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Chipotle’s Q1 revenue will likely rise

For the first quarter, analysts expect Chipotle to report revenue of $1.42 billion—growth of 8.9% from $1.31 billion in the first quarter of 2019. I think the net addition of new restaurants in the last four quarters and positive SSSG could drive the company’s revenue. By the end of 2019, the company operated 2,619 restaurants—an increase of 155 restaurants compared to 2,464 restaurants in the first quarter of 2019. The addition of these 155 restaurants and the restaurants opened in the first quarter will likely drive the company’s revenue.

Meanwhile, Chipotle’s management is working on menu innovation, increasing its digital sales, growing its loyalty program membership, and focusing on marketing and promotional programs to drive its SSSG. In the first quarter, the company introduced Supergreens Salad Mix and Queso Blanco. By the end of last year, the company had installed digital pickup shelves and second make lines for digital orders in all of the relevant restaurants. Chipotle also expanded its delivery service to 98% of the restaurants. The company introduced Chipotlanes in 66 restaurants by the end of 2019. All of these initiatives and the company’s marketing initiatives could drive its SSSG during the quarter.

Closing dine-in spaces due to social distancing guidelines and weak customer turnout due to COVID-19 could be a drag on the company’s SSSG. However, the company has taken initiatives, like free delivery, to combat the slowdown.

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Chipotle’s EPS could fall

For the quarter, analysts expect Chipotle to report an adjusted EPS of $2.92—a fall of 14.0% from $3.40 in the same quarter of the previous year. The lower EBIT margin and higher tax rates could drag the company’s EPS down. Notably, revenue growth and share repurchases in the last four quarters could offset some of the declines.

For the quarter, analysts expect Chipotle’s EBIT margin to decline from 9.0% to 8.3% YoY. Increased operating costs and D&A (depreciation and amortization) expenses could lower the company’s EBIT margin. However, higher gross margins could offset some of the declines. Analysts expect the company’s gross margin to improve from 21.0% to 21.6%. Meanwhile, increased menu prices and lower avocado prices could improve the company’s gross margins.

For the same period, analysts expect Chipotle’s operating expenses to rise from $1.19 billion to $1.30 billion. Increased marketing and G&A (general and administrative) expenses could hike the company’s operating expenses. Due to free delivery from March 15 to March 31 and other marketing initiatives, Chipotle’s marketing and promotional expenses could rise this quarter. Also, the company’s G&A expenses will likely increase from $98.4 million to $120.0 million during the quarter.

For the first quarter, Chipotle’s D&A expenses could rise from $53.8 million to $56.4 million. Additional implementation of the second make lines and Chipotlanes could impact the company’s D&A expenses. Chipotle’s effective tax rate will likely rise from 21.0% to 27.1%.

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Valuation multiple

Chipotle has lost 11.2% of its stock value since its fourth-quarter earnings. Although the stock fell, the company’s valuation multiple increased. As of April 14, Chipotle was trading at a forward PE ratio of 56.7x compared to 47.7x before the announcement of its fourth-quarter earnings. The decline in analysts’ EPS expectations for the next four quarters might have led to an increase in the company’s valuation multiple. However, Chipotle continues to trade at a premium compared to McDonald’s (NYSE:MCD) and Starbucks (NASDAQ:SBUX). On the same day, McDonald’s and Starbucks were trading at forward PE ratios of 26.7x and 30.7x, respectively.

Analysts’ recommendations

Many analysts have cut their target prices in the last few weeks. This month, Wedbush, Credit Suisse, Jefferies, JPMorgan Chase, and SunTrust Robinson have reduced their target prices. Compared to last month, analysts’ consensus target price fell 11.7% from $928.74 to $819.96 as of April 14. The new target price represents a 12-month return potential of 4.4%. Despite the price cuts, Wall Street is bullish on the stock. Among the 32 analysts, 50% recommend a “buy,” 46.9% recommend a “hold,” and 3.1% recommend a “sell.”

Stock performance and my take on Chipotle

YTD, Chipotle has lost 6.2% of its stock value. Despite the fall, the company has outperformed its peers and the broader equity market. During the same period, Shake Shack (NYSE:SHAK), McDonald’s, and Starbucks have fallen 24.6%, 6.9%, and 19.1%, respectively. Meanwhile, the S&P 500 Index has fallen 11.9%. Chipotle’s impressive fourth-quarter performance helped the company outperform its peers.

I’m optimistic about the initiatives that Chipotle’s management has taken to drive its digital sales. However, I think that the stock will be under the pressure in the near term. Due to social distancing guidelines, the company has closed its dine-in spaces. Right now, Chipotle only offers take-out and delivery services, which could impact its sales in the near term. Also, unemployment could reduce the company’s traffic. Since Chipotle owns and operates most of its restaurants, lower sales would impact its margin more than its peers. So, I think investors should avoid the stock until they hear more from Chipotle’s management.

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