Chipotle bucks all trends, analysts weigh in on future of industry star

Nation's Restaurant News, May 5, 2008 by Sarah E. Lockyer

DENVER -- An operating environment made difficult by the dual blows of surging costs and fewer customers forced many companies to report declining profits and sluggish sales in the first quarter. Not so for Chipotle Mexican Grill Inc.

The operator of 730 fast-casual restaurants reported April 23 a 39-percent jump in first-quarter net income and a 29-percent increase in revenue. The Denver-based chain's same-store sales came in at an awe-inducing 10.2 percent over last year.

Chipotle said increased customer visits, more locations and menu price increases helped its performance. The company also noted that its "unique bond" with consumers helped traffic remain positive, up 7 percent. Marty Moran, president and chief operating officer, said Chipotle's success depends on the chain's "focus on doing just a few things better than anyone else."

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For the three months ended March 31, Chipotle earned $17.3 million, or 52 cents per share, versus year-ago earnings of $12.4 million, or 38 cents per share. Latest-quarter revenue totaled $305.3 million.

Analysts discussed whether the company could continue its growth surge.

Jeff Farmer

Jefferies & Co. Inc.

Chipotle said it now expects food costs to increase this year by 0.4 percentage points, or 40 basis points, which Farmer estimated as a "7-cents-per-share headwind." Chipotle has contracted its tortillas and cheese prices, but rice, avocado and proteins are expected to drive the cost pressures, Farmer said.

With same-store sales moderating and additional stock-based compensation taken in the second half of the year, Farmer lowered his full-year estimate by 4 cents per share.

"We acknowledge that 2008 outlook has a hair or two," he said, "but we're sticking with our thesis that a growing fundamental outperformance in current environment will continue to merit premium valuation on shares."

Steven Rees

J.P. Morgan Securities Inc.

New-unit volumes in Chipotle's newer markets, which will account for about 10 percent of development this year, are lower than system averages, Rees said. New units in developing markets average sales of $1 million to $1.1 million, below the overall average for new units of between $1.35 million and $1.4 million and the system average unit volume of $1.77 million.

"We will continue to closely monitor new-unit volume and [same-store sales] trends," he said, "but are not yet overly concerned given apparently strong [same-store sales] in new markets and attractive cash-on-cash returns." Rees estimated Chipotle's cash return totals between 28 percent and 36 percent.

Rees raised his full-year, per-share earnings estimate by 5 cents.

John Glass

Morgan Stanley & Co.

Glass said Chipotle's results could level off with continued pressures on food costs and increased stock-based compensation in the later half of the year. Margin expansion opportunities "are more limited going forward," he added, and same-store sales "appear to be moderating" to mid-single digits.

"Chipotle's results were still outstanding, with the best same-store sales and operating margins in the industry for a company-owned model," he said. "Even as [same-store sales] moderate, [they] are better than peers and new-store growth and new-store productivity remain healthy."

Editor's note: Analyze This is a quarterly look at a publicly traded restaurant company that has sparked discussion--for better or worse--among the securities analyst community. The analyst comments do not necessarily reflect the views of Nation's Restaurant News nor should any statement be construed as a recommendation to buy or sell any security.

slockyer@nrn.com

DEALBOARD

SELECTED
MERGER AND
ACQUISITION
ACTIVITY

TARGET:     Wendy's International Inc. (6,600 units)

ACQUIRER:   Triarc Cos. Inc., parent to Arby's (3,700 units)

ACTION:     Wendy's and Triarc agreed to a stock-based
            purchase agreement valued at $2.34 billion.

STATUS:     Expected to close in the second half of this
            year

COMMENTS:   Arby's CEO Roland Smith will take over as CEO
            of Wendy's, replacing Kerrii B. Anderson.
            Triarc is controlled by longtime Wendy's
            agitator Nelson Peltz, who holds 9.8% of
            Wendy's stock.

TARGET:     Dave & Buster's Inc. (49 locations)

ACTION:     At least four bidders identified in news report,
            including. MidOcean Partners LLP, owners of
            Sbarro Bain Capital Partners, longtime
            restaurant investor Lion Capital LLP, a
            U.K.-based fund Bear Stearns Merchant Banking,
            private-equity arm of Bear, Stearns & Co.

COMMENTS:   Dave & Buster's owner Wellspring Capital
            Management LLC bought the chain for $375
            million in 2006. Fiscal 2007: Net loss narrowed
            to $8.8 million, from $11.6 million a year
            ago. Revenue increased 5.1% to $536.3 million.
            Adjusted EBITDA improved 14.8% to $81 million.