Chipotle Starts 2017 on a Positive Note

Comps increased 17.8% in the quarter, representing a two-year comp decline of 12%. After adjusting for timing differences, management noted that two-year comp trends had improved from a 20% decline in January to a roughly 16% decline in February, March, and April to date. To Chipotle's credit, we think guest-experience improvements such as simplified crew processes and improved training helped, and we expect digital order sales (up 53.5% in the quarter, but off a relatively low base) to have a more magnified impact as the year progresses. Taken together, these improvements reinforce our narrow moat rating and give us comfort with our full-year 2017 comp outlook of around 10%. Also, both restaurant margins (17.7% versus 6.8% a year ago) and operating margins (6.8% versus negative 5.6% a year ago) came in higher than anticipated, and not just because of the leverage inherent with the improving comp numbers. In fact, streamlined food testing procedures, labor scheduling, and overhead cost controls each contributed to margins, and should make full-year restaurant margins in the 18%-19% range achievable, though this is still below management's stretch goal of 20%. These assumptions will bring our full-year EPS estimate to around $8.25, also short of management's stretch target of $10.

Based on first-quarter results and tax-reform adjustments, we're planning a 6% increase in our $425 fair value estimate. Nevertheless, to justify a stock price approaching $500 per share, we believe investors have to assume more meaningful top-line growth and margin assumptions than we're willing to commit to, namely a return to industry-leading comps and peak margins in a little over five years.

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