Morningstar

Chipotle's Results a Mixed Bag

While comps are improving, but it's getting more expensive for the narrow-moat company to drive restaurant traffic.

Securities In This Article
Chipotle Mexican Grill Inc
(CMG)

We believe there are two key takeaways for investors following narrow-moat

The more important message from an economic moat and longer-term cash flow perspective is that it is getting more expensive to drive restaurant traffic, with marketing and promotional costs--which totaled 4.7% of sales--running higher than expected and well ahead of historical norms under 2.0%. This validates our concerns about Chipotle's customers becoming more dependent on promotional activity in the future and supports our views that restaurant and operating margins will recover to the low to mid-20s and the midteens, respectively, over the next five years, well below the mid- to high 20s and high teens a few years ago. We also believe that fourth-quarter margin trends suggest that management's 2017 EPS target of $10 will be difficult to achieve, and after adjusting our model, we remain comfortable calling for EPS of $8-$9.

Taken together, we're not planning material changes to our $425 fair value estimate and believe investors should require a wider margin of safety given the lingering potential for volatility in 2017.

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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