We expect Chipotle Mexican Grill, Inc. CMG to beat expectations when it reports second-quarter 2015 on Jul 21 after the markets close. Last quarter, it posted a positive earnings surprise of 7.48%. Meanwhile, the company has beaten earnings estimates in all the trailing four quarters and has an average positive earnings surprise of 7.77%. Let's see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that Chipotle Mexican Grill is likely to beat earnings because it has the right combination of two key components.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +1.36%. This is meaningful and indicates a likely earnings surprise.
Zacks Rank: Chipotle Mexican Grill has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1, 2 and 3 have a significantly higher chance of beating earnings. Meanwhile, the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Chipotle Mexican Grill's Zacks Rank #3 and +1.36% ESP makes us confident of an earnings beat.
What's driving the Better-Than-Expected Earnings?
Chipotle has been witnessing a fairly stable traffic trend and posting positive comps over the past few quarters on the back of improved guest traffic and better operational efficiency. Menu innovation has been the key to Chipotle's traffic growth.
The company's move toward more organic, sustainably grown or raised, non-genetically modified organisms, and lower carbohydrate ingredients reflects its focus on meeting consumer preference and has been aiding comps growth. Owing to its efforts, recently, Chipotle became the first national restaurant company to use only non-GMO ingredients. Its “Food with Integrity” program has been helping it to gain a loyal consumer base of health conscious consumers as the increase in demand for natural and healthier food in the U.S. is constantly rising.
In fact, the company suspended purchases from one of its suppliers in January 2015, as the supplier did not conform to the standards set for the size and condition of the housing offered to some of the pigs. Although this led to pork being taken off the menu at many of its restaurants, it improved Chipotle's reputation with diners. We expect such efforts to continue to reap benefits going forward.
However, lower supply of pork would take a toll on comps and profits in the soon-to-be reported quarter. In fact, the company expects comps in the second quarter to be in low single digits, which is also due to limited pork supply. Meanwhile, higher food costs, especially for beef,would hurt profits.
Other Stocks to Consider
Stocks in the restaurant industry that have both a positive earnings ESP and a favorable Zacks Rank include:
Jack in the Box Inc. JACK with an Earnings ESP of +2.74% and a Zacks Rank #1 (Strong Buy).
