Chipotle Mexican Grill’s (CMG, Financial) first-quarter fiscal 2015 results were a mixed bag. The company managed to win on the bottom line but failed to meet expectations on the top line. Comparable-store sales, or comps, registered growth of 10.5% on the back of price increases, and it compared unfavorably with 13.4% comps growth in the year-ago quarter. Inclement weather and lower pork supplies were blamed for lower comps growth.
On the back of comps growth and new restaurant openings, sales moved up 20.4% year-over-year to $1.09 billion. As a result of top-line growth and better margins, adjusted earnings per share registered 47% year-over-year growth to $3.88 and comfortably beat consensus estimates.
Pork supply constraint is a headwind
During the quarter pork supplies were limited due to problem with one of the pork suppliers, leading to rolling blackouts of one of popular menu items – carnitas. The popular menu item was off the list across one-third of the outlets of this Mexican-food chain, hitting top line growth.
Although Chipotle said that they have found a new pork supplier, but experts feel that the problem regarding rolling blackouts of carnitas will trickle down till end of this year. The “rolling blackout” strategy, in hindsight, was a misstep as the customers were confused about availability at a given outlet. As a result, growth will take a hit during upcoming quarters.
Rising input cost
Chipotle instituted 6% price hike last year due to higher beef and dairy prices. The avian flu epidemic has caused a further hike in meat and poultry prices. In addition, the avocado prices are expected to remain on the higher side during the second Ă‚ and third quarters of the year.
As a result, customers can expect another price hike in menu items toward the end of this year.
A few other red flags
- The store count expansion rate has declined considerably in terms of percentage growth. This could mean that locations where Chipotle operates are reaching saturation. Opening at not-so-lucrative locations just for store count growth will hit the per store revenue generation and margins.
- The comps growth is slowing down. Management had also warned earlier that the comps growth in the high teens is not sustainable in the long term, and it will slow down into the mid-single digits over the second half of this year
- A combination of slower store count and comps growth will definitely lead to slowing of revenue growth in years to come.
Wrapping up
Chipotle Mexican Grill has grown at a rapid clip in the past, but the growth seems to be slowing down. In the second quarter the company expects the comps in the low to mid-single digit range. In addition an impending price increase toward the end of the year is nothing to cheer about.
Also, pork supply chain problems aren’t going to be fixed very quickly and this will hurt growth further.
Hence, it is better to stay away from the stock for the time being, unless it sees a pullback.
