Well-known burrito maker Chipotle Mexican Grill (CMG, Financial) reported its first quarter earnings on April 21 and disappointed the Street as its revenue fell below expectations though its earnings met the estimates. The stock reacted negatively soon after the earnings were out and fell 5% in after-hours trading. It has been noted that the comp sales were not able to meet the Street estimates, which led to the fall of revenue below analysts’ estimates. Let’s get into the major facts shared during the conference call to get a better insight on the first quarter earnings report.
Revenue fall imminent, though it improves over the last year’s same quarter
The burrito maker posted a mixed earnings report as its earnings topped estimates but the revenue fell shy of the Street forecasts. Though revenue improved to $1.09 billion from $904 million a year ago, it failed to impress the Street that had the revenue hooked to $1.11 billion.
The comparable restaurant sales that is a key industry metric for assessing the quarter performance improved 10.4% year over year during the quarter. However, the analysts were expecting the sales at these restaurants, which were in operation for the past 13 months, to be nearly up by 11.8%. Hence, though the rise in comp sales was fueled by the increase in menu prices for Chipotle, it did not meet the percentage calculated as per the Consensus Metrix estimate.
In fact, for the past few months Chipotle has been suffering from low supply of its carnitas products. While the company is working hard to source more pork that meets the animal welfare standards, its loyal customers have possibly turned their backs. Chipotle CFO John Hartung emphasized during the earnings call, “Many [customers] have decided to hold out until carnitas returns…” This has added to fall in comp sales to a considerable extent though the company feels that it took a right decision to suspend a pork supplier based on the company principles.
The company executives have pinned the slow growth of comp sales to the inclement weather in the Northeast and the absence of pork carnitas in one-third of its restaurants, which kept its pork customers away.
Earnings on the rise as food costs reduce further
The company, which just finished its first “Cultivate” food and music festival, reported earnings of $3.88 a share, over the consensus estimate of $3.66 per share. Though comp sales improvement failed to meet market expectations, food costs have further reduced during the quarter. The earnings beat was well supported by the 60-basis-point decline in food costs year over year as prices of several ingredients fell in the quarter.
Specifically, most of the decline in food costs was linked to a drop in dairy prices along with a drop in prices of avocados. Also the menu price increase of about 7% in the second quarter of the last year aided in accelerating the same-store restaurant sales for the next quarters, and even in the first quarter of the fiscal year 2015, the price increase helped in the rise of earnings for the company.
The management tone remains firm
Though the company is facing a shortage of pork in many of its restaurants in operation, the company has confirmed that it has found a new supplier for its “responsibly raised” pork to fulfill the demand for its pork products. The company has given a promise that the beloved carnitas would be fully available by the fourth quarter of the year. In fact, the company executives agreed that the rolling pork blackout has led to utter confusion with regard to its earnings numbers.
But there could be a headwind down the lane when the company increases its price of steak and barbacoa in the third quarter by 4%-6% to compensate for the persistent beef inflation.
Last word
The upcoming quarters of Chipotle should be interesting to watch as it would show the effect of re-introduction of pork carnitas in its menu list which it presumes will aid in increasing its restaurant same-store sales by a reasonable extent. But as of now, investors are moving away from the stock though analysts are not fully pessimistic on the stock and many have given either a “hold” or “buy” rating on its stock.
