Chipotle: How Much Will Costs Affect Margins?

NEW YORK ( TheStreet) -- Wall Street is expecting good things when Chipotle Mexican Grill ( CMG) reports quarterly earnings after market close. Investors, however, will be watching to see whether the company's margins are impacted by rising food prices.

Analysts, on average, are expecting the fast-casual restaurant to post earnings of $2.81 a share, up 10% compared to the year-earlier period. Revenue is expected to rise 16% to $803 million, according to Thomson Reuters.

U.S. store growth seems to be accelerating at the popular burrito bowl eatery. The company opened 48 restaurants in the first quarter, typically the slowest quarter for openings, "which suggests that its target for 165-180 full year store openings could prove low for the second consecutive year," according to Bank of America Merrill Lynch analyst Joseph Buckley.

However, analysts will be paying close attention to Chipotle's outlook for commodities prices through the rest of the year. The Denver-based company has been hinting at price increases, likely in the fourth quarter, if food prices remain high.

Buckley expects second-quarter margins to decrease 180 basis points "with higher food costs driving half of the decline and heavier marketing spend also coming into play," the note says.

"If food costs seem less threatening, CMG may elect not to raise prices. This could be a negative for the stock if 2Q earnings are sloppy but should not be if the quarter is in line or better than expected," Buckley writes, in a note.

"From a pricing perspective, we suspect management will remain circumspect after having indicated in April that any pricing action would not occur until late summer or early fall ... particularly if they want to assess the potential of a retrenchment in commodity costs," William Blair analyst Sharon Zackfia writes in a July 15 note. "Importantly, we continue to believe the question is when, not if, and view Chipotle's pricing power as among the best in the restaurant industry."

Another issue where analyst opinions vary is same-store sales growth. Analysts are expecting anywhere from 3% to 5% rise in comparable store sales for the quarter.

The restaurant sector has been outperforming the markets this year, specifically the so-called fast casual segment (in between casual full-service dining and quick-service fast food chains), which was the "strongest restaurant sector performing category" in the second quarter with low to mid-single-digit comparable store sales, according to Sterne Agee.

Chipotle shares are up 36% this year versus 19% for the S&P 500. Chipotle, on Thursday, was trading relatively flat, down 0.4% to $374.15 at last check.

Chipotle just passed its 20th anniversary on July 13. With 1,450 stores to date, the company is now looking to international expansion, its gradual rollout of catering options (so far at several hundred restaurants), as well as its newer Asian concept ShopHouse.

Chipotle is "one of our top picks as the company boasts one of the best operating models in the industry, industry-leading unit economics, quality management and near-term top-line catalysts (i.e. catering and increased marketing)," Sterne Agee analyst Lynne Collier wrote in a note on Wednesday.

"Further, we believe that the company can generate earnings growth of approximately 20% over the next several years," the note says. Collier rates Chipotle at buy.

Collier notes that Chipotle, along with Cheesecake Factory ( CAKE) "do not rely on aggressive promotion to drive traffic" and provide a product that has excellent price compared to value, the note says.

Collier expects Chipotle to reiterate its previous guidance, which includes flat to low single digit same-store sales growth (the company is typically conservative with its guidance, Collier notes).

-- Written by Laurie Kulikowski in New York.

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