CMGChipotle Mexican Grill, Inc. (NYSE:CMG) reported financial results for its third quarter ended September 30, 2016.

Overview for the three months ended September 30, 2016 as compared to the three months endedSeptember 30, 2015:

  • Revenue decreased 14.8% to $1.0 billion
  • Comparable restaurant transactions decreased 15.2%
  • Comparable restaurant sales decreased 21.9%, which includes a 0.8% decrease from a revenue deferral related to unredeemed Chiptopia awards
  • Restaurant level operating margin was 14.1%, a decrease from 28.3%. The Chiptopia revenue deferral negatively impacted restaurant level operating margins by 0.9%
  • Net income was $7.8 million, a decrease from$144.9 million. Net income includes a $14.5 millionnon-cash, pretax impairment charge related to ShopHouse and was reduced by an $11.5 millionpretax revenue deferral related to Chiptopia
  • Diluted earnings per share was $0.27, a decrease from $4.59, including $0.29 related to the ShopHouse impairment charge and $0.23 due to the deferral of revenue from Chiptopia
  • Opened 54 new restaurants, net of one closure

Overview for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015:

  • Revenue decreased 18.1% to $2.9 billion
  • Comparable restaurant transactions decreased 17.9%
  • Comparable restaurant sales decreased 24.9% which includes a 0.3% decrease from the revenue deferral related to unredeemed Chiptopia awards
  • Restaurant level operating margin was 12.5%, a decrease from 27.9%
  • Net income was $7.0 million, a decrease from net income of $407.7 million
  • Diluted earnings per share was $0.23, a decrease from $12.92
  • Opened 168 new restaurants, net of 3 relocations or closures

“We continued to make steady progress in our sales recovery during the third quarter. We are earning back our customers’ trust, and our research demonstrates that people are feeling better about our brand, and the quality of our food. While this year has been a year of reinvestment, we are now focused on continuing to further recover sales and improve our economic model to create long-term shareholder value. Today we will share our financial and operational goals for 2017, and our plan to achieve them,” said Steve Ells, founder, chairman and co-CEO of Chipotle.

Comparable Restaurant Sales and Transaction Trends

Monthly comparable restaurant sales declines improved 16.3% from a low of 36.4% in January 2016 to 20.1% (net of 0.7% due to the revenue deferral from Chiptopia) in September 2016. Monthly comparable restaurant transaction declines improved 20.3% from a low of 33.7% in January 2016 to 13.4% in September 2016.

“Our restaurant teams are very excited to see more customers return to their restaurants, and are working hard to reward them with an excellent guest experience. After successfully implementing an industry leading food safety program, and as our marketing efforts are driving more people to our restaurants, it is critical that we are prepared to delight customers on every visit. We are confident that we have the leadership and teams in place to do just that,” said Monty Moran, co-CEO.

Third quarter 2016 results

Revenue for the quarter was $1.0 billion, down 14.8% from the third quarter of 2015. The decrease in revenue was driven by a 21.9% decrease in comparable restaurant sales, including a reduction of 0.8% on comparable restaurant sales resulting from deferring $11.5 million of revenue related to unredeemed awards from the Chiptopia Summer Rewards program that ran during the third quarter of 2016, partially offset by sales from new restaurant openings. Comparable restaurant sales declined primarily as a result of a decrease in the number of transactions in our restaurants, and to a lesser extent from a decline in average check.

We opened 54 new restaurants during the quarter, net of one closure, bringing the total restaurant count to 2,178.

Food costs were 35.1% of revenue, an increase of 210 basis points as compared to the third quarter of 2015. The increase was driven by increased waste costs and higher avocado prices, partially offset by relief in beef prices.

Restaurant level operating margin was 14.1% in the quarter, a decrease from 28.3% in the third quarter of 2015. The decrease was driven primarily by sales deleveraging (including 0.9% from the Chipotle revenue deferral) and an increase in marketing and promotional spend which totaled 4.8% of revenue for the third quarter of 2016 compared to 2.4% of revenue in the third quarter of 2015.

General and administrative expenses were 7.6% of revenue for the third quarter of 2016, an increase of 180 basis points over the third quarter of 2015 primarily as a result of sales deleverage. In dollar terms, general and administrative expenses increased compared to the third quarter of 2015 due to expenses associated with our biennial All Managers’ Conference in September 2016 and higher legal expense, partially offset by lower non-cash stock based compensation expense.

We recorded a non-cash asset impairment charge of $14.5 million related to our ShopHouse Southeast Asian Kitchen restaurants.

Net income for the third quarter of 2016 was $7.8 million, or $0.27 per diluted share, compared to net income of $144.9 million, or $4.59 per diluted share, in the third quarter of 2015.

Our Board of Directors has also approved the investment of up to an additional $100 million, exclusive of commissions, to repurchase shares of our common stock. This repurchase authorization, in addition to up to approximately $69.2 million available as of September 30, 2016 for repurchases under a previously announced repurchase authorization, may be modified, suspended, or discontinued at any time

Results for the nine months ended September 30, 2016

Revenue for the first nine months of 2016 was $2.9 billion, down 18.1% from the first nine months of 2015. The decrease in revenue was driven by a 24.9% decrease in comparable restaurant sales, including a reduction of 0.3% resulting from deferring $11.5 million of revenue related to accounting for Chiptopia, partially offset by sales from new restaurant openings. Comparable restaurant sales declined primarily as a result of a decrease in the number of transactions in our restaurants, and to a lesser extent from a decline in average check.

We opened 168 new restaurants during the first nine months of 2016, net of 3 relocations or closures, bringing the total restaurant count to 2,178.

Food costs were 34.8% of revenue, an increase of 150 basis points as compared to the first nine months of 2015. The increase was driven by increased waste costs and costs related to new food safety procedures, partially offset by the benefit of menu price increases implemented in select restaurants in the second half of 2015.

Restaurant level operating margin was 12.5% for the nine months ended September 30, 2016, a decrease from 27.9% in the first nine months of 2015. The decrease was driven by sales deleveraging and an increase in marketing and promotional spend which totaled 5.2% of revenue in the nine months ended September 30, 2016, compared with 2.1% of revenue for the nine months ended September 30, 2015.

General and administrative expenses were 7.4% of revenue for the first nine months of 2016, an increase of 160 basis points over the first nine months of 2015 primarily as a result of sales deleverage. In dollar terms, general and administrative costs increased compared to the first nine months of 2015 due to expenses associated with our biennial All Managers’ Conference in September 2016 and higher legal expense, partially offset by lower non-cash stock based compensation expense.

Net income for the first nine months of 2016 was $7.0 million, or $0.23 per diluted share, compared to net income of $407.7 million, or$12.92 per diluted share, for the nine months ended September 30, 2015.

Outlook

For 2016, management expects the following:

  • New restaurant openings for the full year at or above the high end of the previously-disclosed range of 220 to 235
  • Comparable restaurant sales declines in the low single-digits for the fourth quarter
  • An effective full year tax rate of approximately 38.2%, which benefited from the recognition of tax credits earned in prior years

For 2017, management is targeting the following:

  • 195 – 210 new restaurant openings
  • Comparable restaurant sales increases in the high single-digits
  • Restaurant level operating margins of 20%
  • An estimated effective full year tax rate of approximately 39.5%, which will be impacted by volatility due to a recently issued accounting standard that changes how the company accounts for taxes associated with stock-based compensation awards.
  • $10.00 earnings per diluted share (Original Source)

Shares of Chipotle Mexican are up nearly 1% to $410.38 in after-hours trading. CMG has a 1-year high of $662.98 and a 1-year low of $384.77. The stock’s 50-day moving average is $417.48 and its 200-day moving average is $421.03.

On the ratings front, Chipotle Mexican has been the subject of a number of recent research reports. In a report issued on October 20, Buckingham Research analyst John Zolidis maintained a Buy rating on CMG, with a price target of $547, which implies an upside of 33% from current levels. Separately, on October 19, Wells Fargo’s Jeff Farmer maintained a Buy rating on the stock .

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, John Zolidis and Jeff Farmer have a total average return of 4.7% and 7.0% respectively. Zolidis has a success rate of 55% and is ranked #1399 out of 4190 analysts, while Farmer has a success rate of 58.5% and is ranked #778.

Overall, 5 research analysts have rated the stock with a Sell rating, 6 research analysts have assigned a Hold rating and 8 research analysts have given a Buy rating to the stock. When considering if perhaps the stock is under or overvalued, the average price target is $398.90 which is -3.0% under where the stock opened today.

Chipotle Mexican Grill, Inc. engages in the development and operation of fast-casual, fresh Mexican food restaurants throughout the U.S., which serve a focused menu of burritos, tacos, burrito bowls and salads. It also has restaurants in Canada, England, France and Germany.