Smoking Hot Results Sends Chipotle Mexican Grill Higher

Pricing Power Drives Results At Chipotle Mexican Grill 

Concerns about Chipotle Mexican Grill’s NYSE: CMG ability to combat inflation have been put to rest. The company exhibited pricing power above and beyond the analyst's expectations and now shares are in reversal. Shares of CMG are up more than 5.0.% in premarket trading and are confirming not only a reversal in the stock but a continuation of the rebound that began two weeks ago. In our view, this stock could easily regain the $1600 and $1700 levels within the next few weeks and then be retesting the all-time highs by the next earnings report. 

Chipotle Continues To Execute Beyond Our Expectations 

We have liked Chipotle Mexican Grill since shortly after CEO Brian Niccol took over. The company has made great strides in the time since, regaining both its brand appeal and growth trajectory and well above the analyst’s consensus. The underpinning factors of the strategy are to maintain quality while expanding menu options and building out the eCommerce channels. That strategy is working and now resulted in pricing power in a world where margins are coming under increasing pressure. 

The company reported $2.0 billion in net revenue to beat the Marketbeat.com consensus by 200 basis points. The revenue was driven by a 15.2% comp and the addition of 78 new stores. Digital sales grew 3.8% on top of last year’s strong showing and now account for 41.6% of sales. Notably, expansion into small towns has proven to be a good move with those stores often performing better than their peers in larger urban settings. 

As for margins, higher pricing helped the company to lever its volume strength at both the restaurant and company level. Restaurant operating margin improved by 70 basis points to 20.2% and company level margin by 80 basis points to 8.1% with both helping to drive YOY gains in earnings. On a GAAP basis, the company’s earnings are down YOY but there are one-off tax factors at play that don’t show up in the adjusted earnings. On an adjusted basis, the company reported $5.58 in EPS to beat consensus by $0.29 and grow nearly $2.00 above last year’s levels. 

Chipotle’s Guidance Is Mmm Mmm Good 

Chipotle issued guidance for the coming quarter and an improved outlook for the long-term picture. The company is expecting Q1 comps to come in the mid to high-single-digit range and for the addition of 235 to 250 new stores for the year. As for the long-term outlook, the company says its forays into smaller-town America have allowed it to up its target of 6,000 stores in North America by 1,000 or 16.6% and for unit growth to run in the 8% to 10% range annually. These numbers also include the addition of Chipotlane’s to current restaurants as well as the Digital Kitchens. 

The Technical Outlook: Chipotle Mexican Grill Is Steaming Higher 

Price action in Chipotle Mexican Grill is rocketing higher in premarket action and may move much higher during the session due to the analyst's commentary. The analysts are abuzz with the new growth targets but, for some reason, several lowered their price targets. Regardless, the Marketbeat.com consensus estimate is running about 30% above the premarket action and the high price target suggests a more robust 90% gain is possible. In our view, investors should expect a test of the short-term moving average (or thereabout) before the stock moves higher but we think it is going to move higher. A confirmed test of support should then result in a move up to the $1,600, $1,700, and $1,800 levels before an eventual test of the consensus target of $1,975.