* Reports Wednesday, April 24, after the market close
* Revenue Expectation: $1.26B
* EPS: $2.94
Denver-based Chipotle Mexican Grill Inc (NYSE:CMG) has seen a spectacular turnaround over the past year. Its shares have soared, bringing the restaurant chain close to the levels they were trading at before the first of several outbreaks of E. coli and norovirus at some of its restaurants in 2015.
After gaining 64% during the year so far, Chipotle stock was heading toward its August 2015, $758.6 record high, before dropping over the past three sessions, to close yesterday at $688.21. With the stock surge, it appears customers have mostly forgotten about the outbreaks that had such a devastating impact on the Mexican fast-food giant’s customer traffic and revenues in the following quarters.
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When Chipotle releases its first-quarter earnings on Wednesday, April 24, investors will seek reassurance that the company’s turnaround plan is well on track and it’s sustaining the uptrend in its comparable sales growth.
Encouraging Developments
Digging a little deeper into CEO Brian Niccol’s turnaround strategy, we see some very encouraging developments that are helping the food-chain at a time when the U.S restaurant industry overall has been struggling to bring diners to their tables.
First, he is very successfully implementing his digital initiatives and customers are responding to that. In the fourth-quarter, Chipotle showed about 66% growth in its digital sales from a year earlier period, and that accounted for 13% of overall sales during the period.
That company was able to make that meaningful transition to online channels by making some simple in-store changes, such as adding second “make lines” for assembling burritos that were ordered online, and digital pick-up shelves. These smart moves drastically improved the customer experience and propelled online sales.
To further build on its digital momentum, Chipotle this year is rolling out its loyalty reward program nationally that has already racked up a million members. The company began testing Chipotle Rewards last year in some markets, with promising results. It also plans to add dedicated drive-through lanes for picking up orders placed through its popular mobile app at some stores.
The other move that helped win back customers was Chipotle’s revamp of its food-handling practices, such as adopting quarterly food-safety training for employees and putting in place a new food-preparation system.
The result of these positive developments has been that analysts are fast changing their revenue expectations for the restaurant giant. According to analysts' average estimates, Chipotle is likely to post 24% average growth in profitability per year during the next five years, a sharp rebound from the past five-year period when growth sank to negative 17% per year.
In the quarter that ended in March, profit is likely to grow to $2.94 a share, up from $2.13 a share a year ago, while sales are forecast to jump about 10% to $1.26 billion, according to analysts’ average estimates.
Bottom Line
Even after such a robust comeback, we don’t believe Chipotle stock has run its course, as some analysts believe. We think the stock will continue to benefit from the company's turnaround process and the leadership qualities of its CEO Brian Niccol.
He has been a powerful force in the bid to regain customer confidence and bring back operational discipline to a business that was teetering on the brink of disaster just three years ago. The restaurant chain's earnings report next week is likely to support our bullish view.