Chipotle Mexican Grill Serves Up Another Entry Point

Key Points

• Chipotle Mexican Grill had a tepid quarter relative to consensus but still strong. 
• Analysts are lowering their targets but to a level above the current price action. 
• Repurchases and plans for international expansion will help support the market. 

Shares of Chipotle Mexican Grill NYS: CMG are down about 10% following the Q2 earnings report, but this is not the time to head for the exit. The company’s report was mixed but not worth 10% given the growth outlook, which includes an international expansion. Some takeaways from the report include double-digit top-line growth, wider margins, and better-than-expected earnings, which will all support the market over time. 

Chipotle Results Are Hot, But The Sizzle Is Gone 

Chipotle Mexican Grill had a great quarter with revenue of $2.51 billion, growing 13.6% compared to last year. The problems for the market begin with the comp to the Marketbeat.com consensus, which is negative. The mitigating factors are that the miss is marginal at best, about 80 basis points, offset by margin improvement.

The data within the revenue figure is also on the tepid side but reveals the company continues to resonate with consumers, which means pricing power. On a comp basis, comp store sales are up 7.4% to miss consensus by 30 bps, with in-store sales up 15.8% across the chain and digital accounting for 38% of revenue.

Notably, the new menu item Chicken Pastor drives this quarter’s success and accounts for 1-in-5 transactions. 

The margin news is equally mixed with restaurant-level operating margin improving by 230 bps and operating margin by 190 bps. Both are less than expected but prove the company has leverage and pricing power.

The margin improvement is attributed primarily to pricing action last year and lower avocado prices to a lesser extent. The takeaways are that the $12.65 in adjusted EPS is up 36% from last year; it outpaced top-line strength by nearly 3:1 and outpaced the consensus by 300 bps despite the margin “weakness.” No reason for shares to fall 10%, and certainly no reason for them to stay down. 

Guidance is another mixed bag, with Q3 expected to experience additional slowing but for the full year to be solid. The Q3 revenue target is growth in the range of low-to-mid-single-digits, with the full year at mid-to-high-single-digits.

The salient point in the CEO commentary is the reference to investments laying the groundwork for International growth. An international growth agenda could easily double Chipotle’s footprint.

As it is, CMG expects to open about 270 stores this year, including the 47 opened in Q2. Those included 40 new Chipotlanes, which will enhance the digital revenue mix. 

The Analysts Lower Their Targets: Double-Digit Upside Ahead 

The analysts have begun to lower their targets for CMG stock but take that with a grain of salt. The 5 revisions to show immediately after the release are all downward but consistent with the Marketbeat.com consensus estimate of $2137. That figure is about 12.5% above the current action, trending higher than last month, last quarter, and last year.

The new revisions may hinder market action in the near term, but this trend suggests upward momentum could remain strong. 

Share repurchases will help with the momentum. The board authorized another $100 million in repurchases, bringing the remaining authorization up to $294.7 million or about a half percent of the market cap. That’s not a large figure, but investors can expect repurchases to continue indefinitely. 

The Technical Outlook: Chipotle Corrects To The EMA 

Chipotle Mexican Grill shares fell about 10% following the Q2 release but have halted the plunge above the long-term EMA. This is a sign of potential support at a critical level that could lead to a rebound if confirmed. If not, this stock could fall to the $1800 level or lower, where it would present a better value and opportunity for investors.