Chipotle's Results a Mixed Bag
While comps are improving, but it's getting more expensive for the narrow-moat company to drive restaurant traffic.
We believe there are two key takeaways for investors following narrow-moat
The more important message from an economic moat and longer-term cash flow perspective is that it is getting more expensive to drive restaurant traffic, with marketing and promotional costs--which totaled 4.7% of sales--running higher than expected and well ahead of historical norms under 2.0%. This validates our concerns about Chipotle's customers becoming more dependent on promotional activity in the future and supports our views that restaurant and operating margins will recover to the low to mid-20s and the midteens, respectively, over the next five years, well below the mid- to high 20s and high teens a few years ago. We also believe that fourth-quarter margin trends suggest that management's 2017 EPS target of $10 will be difficult to achieve, and after adjusting our model, we remain comfortable calling for EPS of $8-$9.
Taken together, we're not planning material changes to our $425 fair value estimate and believe investors should require a wider margin of safety given the lingering potential for volatility in 2017.
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