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By Brian Nelson, CFA
Best Ideas Newsletter portfolio holding Chipotle Mexican Grill (CMG) reported solid fourth-quarter earnings results February 7, but they came up short relative to more optimistic consensus expectations. Total revenue advanced 11.2% in the quarter thanks to solid comparable restaurant sales expansion of 5.6%. Consensus, however, was looking for 7% comparable restaurant sales expansion in the period. We’re not reading too much into the miss.
During the fourth quarter, the burrito maker’s operating margin leapt ~550 basis points, to 13.6%, and its restaurant level operating margin came in at 24% in the quarter, which was up 380 basis points from the same period a year ago. Adjusted diluted earnings per share was $8.29 in the period, up 48.6% on a year-over-year basis. The high end of our fair value estimate range of Chipotle stands at $1,758 per share, and we think the company’s shares still have upside potential.
Looking ahead to 2023, the firm expects comparable restaurant sales growth in the high-single-digits for the current quarter, which should be achievable given that January comparable restaurant sales growth came in the low-double digit range. The company expects to open 255-288 new restaurants in 2023, a number that includes roughly a dozen or so restaurants that will be relocated to accommodate a Chipotlane drive-through. Adding more Chipotlanes, an initiative that grew out of meeting the needs of consumers during the worst of the COVID-19 pandemic, is key to our long-term thesis on the name.
The pace of restaurant growth for 2023, in our view, is achievable as Chipotle opened 236 restaurants during 2022 with roughly ~86% of them including a Chipotlane. Long term, Chipotle has plans to expand to 7,000 restaurants, up from nearly 3,200 restaurants at the end of 2022. The company still holds the wild card of expanding into the breakfast daypart, which we believe is a huge source of upside potential for the burrito maker, especially as it adds more drive-throughs across its restaurant portfolio. Breakfast and drive-throughs go hand in hand, in our view.
It’s great to see Chipotle’s margins advance on a year-over-year basis. The company noted that food, beverage, and packaging costs fell 230 basis points as a percentage of total revenue during the fourth quarter. Menu price increases helped, but lower avocado prices also contributed. Chipotle noted that it experienced higher costs for dairy and tortillas, but it seems that inflation isn’t punishing companies as much as it did earlier in 2022.
Chipotle approved another $200 million in share repurchases, and now has ~$414 million in total repurchase authorization to scoop up its own stock. We have no qualms with the decision to buy back stock, and we take the move to mean that the executive team is being prudent in its pace of unit restaurant expansion, especially given the tremendous long-term potential to add thousands of more restaurants around the globe in the coming years to decades.
During 2022, Chipotle generated operating cash flow of $1.32 billion while it spent $479.2 million in leasehold improvements, property and equipment, good for $844 million in free cash flow generation, which is up from $839.6 million in free cash flow generation in 2021. At the end of 2022, Chipotle had cash and cash equivalents of $384 million and long-term investments of $388.1 million. Long-term operating lease liabilities were $3.495 billion at the end of last year, so investors of Chipotle have to get comfortable with its financial leverage.
We continue to like shares and believe Chipotle’s long-term potential is incredibly bright.
Chipotle’s 16-page Stock Report (pdf) >>
Tickerized for CMG, DPZ, YUM, YUMC, GRUB, DASH, UBER, MCD, ARCO, WEN
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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