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Chipotle Mexican Grill, Inc. (CMG) Q4 Earnings Preview: Little Margin(s) For Error

 February 04, 2013 12:19 PM
 


(By Rich Bieglmeier) Chipotle Mexican Grill, Inc. (CMG) will host a conference call to discuss fourth quarter and full year 2012 financial results on Tuesday, February 5, 2013 at 4:30 PM Eastern time. A press release with fourth quarter and full year 2012 financial results will be issued at approximately 4:00 PM Eastern time that same day. Wall Street anticipates that CMG will earn $1.96 for the quarter. iStock expects the restaurants company to report earnings that will top Wall Street's consensus number. The iEstimate is $1.98, a $0.02 upside surprise.

Chipotle develops and operates fast-casual, fresh Mexican food restaurants in the United States, Canada, the United Kingdom, and France. Its restaurants primarily offer burritos, tacos, burrito bowls, and salads. As of October 18, 2012, it operated approximately 1,350 restaurants.

[Related -Chipotle Mexican Grill, Inc. (CMG) Extends Gain In Strong Uptrend]

In the last four years, Chipotle has delivered tasty earnings. Thirteen of the last 16 quarterly checkups have topped Wall Street's estimate by an average of 15.38%.  The trifecta of misses averaged 2.58% less than the consensus target.

While the restaurant chain has rolled by forecasts, its share price has given investors heartburn as of late. The stock has fallen off the table by 20%, 25.4%, and 6.8% in the days surrounding earnings for the past three announcements in a row, from latest back.

Overall, Chipotle's stock price has made long investors happy 11 times, gaining a lucky average of 7.77% with a range of 1.3% to 15.90%. The handful of drops has been more dramatic, skidding 13.88%, on average, with a range of -4.40% to the aforementioned 25.4%.

[Related -Chipotle Mexican Grill, Inc. (CMG): This High-Flying Stock Could Tumble 50%]

Much of the intrigue for Tuesday's news was removed on January 15th as management announced it expects eps to be in the range of $1.92 to $1.97, revenue expected to increase 17.2% to $699.2 million, comparable restaurant sales expected to increase 3.8%, 60 new restaurants, but most importantly, restaurant level operating margin expected to be about 24.6%, a decrease of 150 basis points compared to the fourth quarter of 2011.

According to Reuters, "The worst drought in more than 50 years in the U.S. Midwest has pushed up prices for feed corn and led to the smallest cattle supply in more than 60 years." In other words, beef and other meats are getting more expensive. To make things more difficult for restaurants, the largest U.S. meat supplier, Tyson Foods is cutting back on annual fixed-price agreements. This makes it far more difficult for companies like CMG to hedge against rising food costs, which accounts for about 33.5% of sales including beverage and packaging -  up from 32.6% last quarter.

While earnings will be important, much of their impact will be blunted by the pre-announcement. Instead, Wall Street will focus on management's plan to raise prices, add to the menu, maybe a breakfast menu? and cutting costs. Without a credible plan to at least hold margins in place, investors could be served another dish of cold hard losses following earnings.

Investors who own Chipotle Mexican Grill, Inc. (CMG) might think about some out of the money put options as insurance.

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