RRGB Red Robin Gourmet Burgers Inc

Fast food restaurant chain, Chipotle Mexican Grill Inc. (CMG) is slated to release its second quarter 2011 results on Tuesday, July 19, after market closes. The current Zacks Consensus Estimate for the second quarter of 2011 is $1.68 per share, representing an annualized growth of 14.73%.

With respect to earnings surprises, Chipotle has outperformed the Zacks Consensus Estimate in all the trailing four quarters. The earnings surprise ranges from 2.1% to 16.9%, with the average at 9.5%. This implies that the company has surpassed the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Previous Quarter Recap

Chipotle’s first quarter 2011 earnings of $1.46 per share surpassed the Zacks Consensus Estimate of $1.43, and increased 22.7% from $1.19 in the prior-year quarter.

Revenues in the quarter shot up 24.3% year over year to $509.4 million while comparable store sales rose 12.4% in the quarter from 4.3% in the prior-year quarter.

The better-than-expected results were primarily driven by strong top-line growth, buoyed by higher traffic and new restaurant openings.

Restaurant operating margin was down 90 basis points (bps) to 25.2%, attributable to a 180-bp (as a percentage of total revenue) spike in food, beverage and packaging costs, and a 60-bp rise in other operating costs, partially offset by a 80-bp drop in labor and a 70-bp fall in occupancy.

Outlook

For fiscal 2011, management expects mid-single-digit comparable store sales growth compared with its previously projected low single-digit growth range.  

For fiscal 2011, the company expects to open 135–145 new restaurants, compared with 121 and 129 restaurants in 2009 and 2010, respectively.

Estimate Revision Trend

Estimates for the upcoming quarter remained unchanged over the last 60 days, implying that the analysts are maintaining their outlook on the stock.

The current Zacks Consensus Estimate is pegged at $6.82 for 2011, reflecting a year-over-year growth of 20.88%. The Zacks Consensus Estimate for 2012 is $8.49, indicating a year-over-year growth of 24.54%. The estimate revision trends and the magnitude of such revisions justify the strength of the stock.

Agreement of Estimate Revisions

In the last 30 days, 3 out of the 20 analysts covering the stock raised their second quarter estimates, 4 out of the 22 analysts hiked their estimates for fiscal 2011 and 3 out of the 21 analysts increased their estimates for 2012. However, only one analyst reduced estimates for the coming quarter and fiscal 2011 and 2012. The analysts’ revision trends reflect a positive inclination.

Over the last 7 days, the positive bias prevailed as two analysts raised their estimates for the second quarter, 2011 and 2012, respectively, while none moved in the opposite direction.

The analysts by and large are impressed with improving traffic trends, strong operational focus and higher comps growth expectations. Chipotle has been able to post positive same-store sales in the past quarters amid a challenging economic scenario, where most of the restaurant companies struggled to plug declining sales.

The analysts are also optimistic regarding Chipotle’s business model, which thrives on marketing initiatives, throughput enhancement and work force development. To combat rising food costs and ensure margin expansion, the company has finally begun its price increase initiative and plans to implement broad-based price increase before the third quarter of 2011.

Magnitude of Estimate Revisions

Over the past 60 days, Chipotle’s estimates for the second quarter 2011 have not budged. Therefore, the analysts expect the company to report in line.

However, the analysts remain optimistic regarding fiscal 2011 and 2012. In the last 7 days, estimates for 2011 and 2012 jumped 1 cent and 4 cents to $6.82 and $8.49, respectively.

Our Take

We expect Chipotle’s earnings to surpass expectations as the economy is improving, but results are expected to be partially offset by higher food, labor expenses and lack of price hikes in the second quarter.

Chipotle is well positioned to expand rapidly while generating improved earnings margins and returns on invested capital. With a strong balance sheet, consistent earnings, healthy cash flow, excellent unit economics and continued marketing initiatives, we believe that the stock provides relative safety and consistent growth.

Moreover, the company’s ‘Food With Integrity’ program also provides a significant competitive edge in the fast-casual segment. Additionally, Chipotle has been exhibiting a commendable unit expansion plan, both domestically and internationally. Chipotle also plans to open its first Asia-themed restaurant in Washington, D.C this summer.

However, Chipotle faces raging discount wars among quick-service operators and higher input and labor costs resulting in margin contraction. Moreover, the company’s customers remain sensitive to macroeconomic factors, which may restrict their discretionary spending, thereby negatively affecting the company’s growth and profitability.

Consequently, Chipotle has a Zacks #2 Rank, implying a short-term Buy recommendation on the stock. We also reiterate our long-term Neutral rating. One of Chipotle’s primary competitors, Red Robin Gourmet Burgers Inc (RRGB) will report its second quarter 2011 results on August 8, 2011.

 
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