Here’s Why Chipotle Deserves a Burrito After Its Results

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Many investors are bracing themselves for McDonald’s (NYSE:MCD) third-quarter earnings that are set to be released early Monday morning, hoping that the world’s largest fast food chain can redeem itself after consistent same-store sales losses and a falling share price.

Those with a stake in Chipotle Mexican Grill (NYSE:CMG), on the other hand, are celebrating with a burrito Friday, because although the fast-growing chain missed on its earnings that were released Thursday after the bell, its revenue of $826.9 million managed to beat Wall Street forecasts and its same-store sales were also up 6.2 percent, blowing past expectations.

The earnings report sent shares up 12.98 percent to $496.61 by midday Friday, and according to Reuters, Chipotle maintained confidence for future progress as it projected mid-single-digit percentage growth for same-restaurants sales in its full-year forecast, and low single-digit percentage growth for 2014.

Unlike many struggling fast food restaurants, Chipotle has managed to report sales success and significant revenue growth this year as it continues to welcome new customers into its locations who wish to collect their food fast and for a low price, but not at the expense of healthy ingredients.

The burrito chain was the first major U.S. restaurant to publish which of its ingredients contain GMOs, or genetically modified organisms, and it has erected a goal to completely eliminate GMOs from its products in the future. Chipotle is also known for the freshness of its ingredients, hinting to McDonald’s that maybe fast food success has nothing to do with menu innovations, but rather the quality of ingredients.

The Denver, Colorado-based company also hasn’t fallen behind in the food trends, and it rolled out tofu offerings in many of its locations earlier this year, attracting more from health-conscious consumers. In addition to its food, Chipotle also concentrates significantly on its marketing, and it credits its new campaign called Skillfully Made for its recent increased success. The chain is now spending more money on marketing and traditional advertising than ever before, and it believes that these promotions will help it increase revenue 16 percent this year, according to Bloomberg. 

Although Chipotle did miss on its earning estimates, reporting $2.55 a share rather than analysts’ expectations of $2.78Barron’s reports that the miss isn’t significant and wasn’t enough to derail a stock surge because the chain’s same-store sales and revenue gains made up for the loss. The report even highlighted an analyst note by Morgan Stanley’s John Glass and Jake Bartlett.

“Given the lackluster consumer environment, CMG is an even scarcer commodity today for investors. [The] top-line momentum overshadows an 11c (4 percent) EPS miss, driven primarily by COGS, G&A and pre-opening. Higher pre-opening is temporary, but food costs will likely linger at least into the 4Q (produce inflation) and G&A into ’14 (stock comp conference costs.) Labor remains favorable, but ‘other operating’ de-levered with higher marketing (though under plan), which is having a material, though not quantified, impact on top line.”

Thus, it is clear that Chipotle has somehow managed to navigate fast food chain success despite an evolving consumer base that demonstrates more of a commitment in healthier, unprocessed foods. It’ll be interesting to see how Chipotle and McDonald’s earnings reports match up come Monday, and who knows, maybe McDonald’s will even ring Chipotle for some advice.

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