While McDonald's (MCD) shares were stumbling approximately 2.1% on Tuesday to $95.51 following second-quarter earnings that disappointed Wall Street, Chipotle shares were surging 11.9% to $660.06. The stock hit a new all-time high shortly after the market opened based on investors' expectations that the company has far more opportunity ahead of it as it expands its store count, grows its nascent catering business, continues to improve store operation metrics and satisfy a widening demographic that is eating its burrito bowls, all with a recent menu price increase that partially offset surging food costs.
The Denver-based company reported second-quarter net income rose 25% to $110.3 million, or $3.50 a share, from a year earlier and ahead of analysts' expectations of $3.08 a share as noted by Thomson Reuters. Comparable restaurant sales, which measures sales growth or declines at restaurants opened at least a year -- rose a whopping 17.3%, which Chipotle attributed to increased store traffic as well as the menu price increase it completed in the quarter.
Revenue overall rose 28.6% to $1.05 billion, also beating expectations of $989 million. Chipotle also opened 45 new stores in the quarter bringing its store count to 1,681.
Based on the quarter's results, Chipotle raised its sales guidance for 2014 to a comp range in the "mid-teens" compared to its previous guidance of "high single digits."
Chipotle has been suffering from higher food costs on commodity items like beef, cheese and avocados. The company said food costs rose 150 basis points to 34.6% of revenue for the June 30-ending quarter, it said. The increase was driven by higher prices for beef, avocados and dairy, but was somewhat offset by the menu price increase and lower tomatillo prices, it said.
So far customers have not been deterred by the menu price increase, which on average ranged between 6.25% and 6.5%, with steak prices rising by approximately 9% and chicken prices up about 5%, the company said last night on its earnings conference call.
"We expected some customers would trade down from steak to chicken as a result of a higher steak premium and we have in fact seen some customers shift from steak to chicken," CFO Jack Hartung said on the call. "Aside from the slight shift from steak to chicken, our customers have generally responded well so far, but it is early and we'll continue to watch for resistance in terms of fewer customer visits as well as customers trading down."
Wall Street was impressed with the results. Sell-side analysts were in a state of flurry on Tuesday ratcheting up their long-term price targets and earnings estimates as Chipotle continues to outperform expectations and momentum doesn't seem to be stopping. Here are a few analyst commentaries following last night's earnings release.
John Ivankoe, JPMorgan Chase (Overweight; raised PT by $95 to $670)
We continue to see Chipotle as a "once-in-a-decade" type of brand, with long-term value in shares.The company's existing and future sales drivers, latent pricing power,square footage growth, margin expansion opportunity and still reasonable FCF [free cash flow] yield of2%+ continue to make the stock in our view an attractive investment despite a P/Emultiple well above peers. Meanwhile, viewing the stock much longer-term thecompany has optionality of other fast casual brands (Shophouse, Pizzeria Locale) andinternational growth. We view none of these three "growth seeds" as having the samerisk/reward opportunity as Chipotle in the US, but each as relatively low costoptionality for shareholders that could drive growth as the domestic Chipotle businessmatures in 2020 and beyond. Until then, performance in both comps and new units fordomestic Chipotle suggests that there is major opportunity in the existing brand in theUS, especially as new construction offers more real estate opportunities. We continueto like the stock at current levels for long-term investment and establish a Dec-15 pricetarget of $670.
Jeff Farmer, Wells Fargo Securities (Market Perform; valuation range upped to $650-$675 from $580-$600)
Putting a 17.3% SSS number in context [is] unprecedented for a concept with about 1,700 units and $4B in annual sales. Double-digit restaurantSSS are rare, period--occasionally only seen with very early-lifecycle stagecompanies. In detailing its double-digit transaction growth, CMG pointed tothroughput, catering and a broadening of its core demographic--but even incombination, we think these drivers explain only a portion of the unprecedentedtransaction growth at this stage of the lifecycle. Regardless, we've modeled a15.6% 2014E SSS number, which off of $3.2B in sales in calendar 2013 impliesCMG (with its comparable restaurants alone) has won about $500MM in market share across the quick service, fast casual and casual dining segments.
Jason West, Deutsche Bank (Hold; price target upped by $55 to $630)
For 2015, we now have restaurant margins @ 28.7% and EBIT margins @ 19.1%, both new peaks for CMG. While the math and CMG's history suggest our model is accurate, we question whether these types of margins are sustainable over the [long term] for a company-operated business. (Typical avg. = ~18% restaurant margins and ~10% EBIT margins). ... While we have clearly missed this rally and estimate reset, 3Q is likely to be the high water mark for SSS in this cycle. We'd prefer to wait for the next hiccup before getting more constructive.
--Written by Laurie Kulikowski in New York.