After hours on Thursday, Chipotle (CMG) surprised with a slight revenue beat and a slight earnings miss. Yet the stock was up in after-hours, and saw double-digit rises on Friday with numerous upgrades and higher price targets from analysts. Why is this happening?
First, let’s look at the big numbers: net income rose to $2.66 EPS, below estimates. Revenue was up by 18% year-over-year to $826.9 million, less than one percent above analyst estimates. So why the rally?
The Importance of Many Metrics
The case of Chipotle demonstrates the need for analysts to look at more than just one or two metrics. In many cases, retail investors will obsess over top line or bottom line growth, and agonize over slight hits or misses. Savvier investors, on the other hand, look for other key metrics, especially in new growth stocks, which CMG remains to be for now.
So what metric is important? Before answering that question, let’s first consider exactly what kind of company CMG is. Yes, it’s a Mexican-food chain with burritos, margaritas, and the rest, but it’s much more than that. CMG is not like Taco Bell (YUM), which has seen weak sales growth. It’s also not like an upscale restaurant, either. It’s somewhere in the middle, and is one of the archetypal examples of a new slice of the dining sector. Called “fast-casual”, CMG is somewhere inbetween fast food restaurants and casual restaurants like DRI or EAT brands.
And this sector is growing very well. It is a relatively new experience and it is growing in popularity in America. For whatever reason, Americans are losing interest in pure fast food, but they’re not going the full foodie route either–they want something inbetween. CMG is filling that niche with little competition.
But how do we know that CMG is attracting the interest of this trend towards this new type of restaurant? The key is same-store sales. For CMG restaurants that have been open for over a year, sales rose 6.2%, above the average analyst expectation of 4.7%, with the company raising guidance on same-store sales in the coming quarter.
This is the key metric. Why? Because it measures the traction of CMG’s appeal to the fast-casual dining sector, and the sustainability of the sector as a whole. This surprise bet suggests that fast-casual is here to stay, justifying a higher P/E ratio on the expectation that Chipotle’s magic combination will continue to attract consumers.