The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

31 October 2007

Chipotle Mexican Grill/CMG reports!

Chipotle Mexican Grill/CMG reported a 75% rise in Q3 earnings, exceeding analysts' expectations, due to continued strong sales growth and operating efficiencies. The latest results prompted shares of the Denver-based fast food chain more than 3 percent higher in pre-market activity.

Since being spun off from
McDonald's Corp/MCD (this 'fact' is so wrong; when will CMG stop being mentioned as a spin-off? McDonalds had only an equity interest in the company, since sold. -- dmg),
Chipotle has seen its shares soar. The stock has climbed more than 134 percent since the beginning of the year, and is up about 117 percent since mid-February, when we first recommended buying shares of the company. Despite consumer pressures and commodity cost inflation, which have weighed on many other restaurant companies, we believe Chipotle remains well positioned for the long term given the strength of its operating strategies and active expansion plans.

For the third quarter, Chipotle posted a profit of $20.6 million, or $0.62 per share, up from $11.8 million, or $0.36 per share, in the year ago period. Revenue grew 35.5 percent year-over-year to $286.4 million, as more customers visited the company's restaurants. The results easily beat Wall Street's expectations. Analysts on average were expecting a more modest profit of $0.53 per share on $279.5 million in revenue.

Growth in the quarter was driven by a 12.4 percent increase in comparable restaurant sales as well as the addition of 28 new restaurants, including 26 restaurants in existing markets and and two in new markets. Despite higher food costs, restaurant level operating margins increased 150 basis points to 23 percent, due to efficiencies in labor. The addition of naturally raised meats in some markets led to menu price increases and also helped margins increase.

Based on the latest results, Chipotle sees comparable restaurant sales increases in the low-double digit range this year, and increases in the low to mid-single digit range in fiscal 2008.
(end commentary by Briefing)

Have no doubt: despite the extraordinarily outstanding performance Chipotle puts in as it repeatedly executes on all fronts, the shares sell for a nosebleed valuation. Some investors even argue the stock is priced for perfection. Akin to ISRG last week, I will seek the moment of extreme, obscene strength to lighten my position.

Full Disclosure: Long the shares of Chipotle Mexican Grill/CMG
-- David M Gordon / The Deipnosophist


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