Spicy Sales with a Small Dash of Caveat Emptor

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Consumers' tastes for Mexican menu offerings are robust in many parts of the world. This is very evident when looking at the latest financial results for Chipotle Mexican Grill (NYSE: CMG). The company develops and operates fast-casual, fresh Mexican food restaurants. As of Feb. 5, 2013, they operated approximately 1,410 restaurants. In early February, the company reported financial results for their fourth quarter and full year ended Dec. 31, 2012.

Highlights for the fourth quarter of 2012 compared to the fourth quarter of 2011 include revenue increasing 17.2 percent to $699.2 million. Comparable restaurant sales increased 3.8 percent, and net income was $61.4 million, an increase of 6.8 percent. Their Diluted Earnings per Share was $1.95, an increase of 7.7 percent. However, restaurant level operating margin was 24.6 percent, which represented a decrease of 150 basis points.

Highlights for the twelve months ended Dec. 31, 2012, compared to the prior year include revenues increasing 20.3 percent to $2.73 billion. Comparable restaurant sales increased 7.1 percent, and the restaurant level operating margin was 27.1 percent, an increase of 110 basis points. Net income was $278.0 million, an increase of 29.3 percent. Their Diluted Earnings per Share was $8.75, an increase of 29.4 percent. The company opened 183 new restaurants in 2012.

What are the positives for investors to consider?

The growth in fourth quarter revenue was due to new restaurants not in the comparable base and a 3.8 percent increase in comparable restaurant sales. Chipotle Mexican Grill is being aggressive with new restaurant openings, broadening their network significantly. In 12 months they opened 183 locations – an average of 15.25 locations every month.

The driver of comparable restaurant sales growth was primarily increased traffic. Therefore, via quality marketing and promotions, along with their focus on sustainably raised ingredients and food prep using classic cooking techniques in open kitchens, the company is getting more diners into already established locations.

What is something to be concerned about for investors?

Investors should consider rising commodity costs for restaurants in general and Chipotle Mexican Grill in particular. The company experienced increases in beef costs and increases in the cost of salsa ingredients and dairy. The drop in restaurant level operating margin in the fourth quarters was mainly because of these higher food costs. Food costs were 33.5 percent of revenue in the fourth quarter, representing an increase of 130 basis points.

The United States Department of Labor – Bureau of Labor Statistics reported in November 2012 that the U.S. experienced their worst drought since the 1980s in the summer of 2012 ( referencing: "U.S. Drought 2012: Farm and Food Impacts," United States Department of Agriculture, Sept. 25, 2012). The report discussed the all too familiar chain reaction of events: dry conditions - crop failure - reduced supplies – price increases.

For Chipotle Mexican Grill and other restaurant chains, such as Darden Restaurants (NYSE: DRI), BJ's Restaurants (NASDAQ: BJRI), and others, the concern is cost "trends."  BJ's Restaurants' most recent reported financial results were for their third quarter of fiscal 2012 that ended Oct. 2, 2012. Highlights for the third quarter of fiscal 2012, compared to the same quarter the year prior, included total revenues increasing approximately 16 percent to $175.2 million. Comparable restaurant sales increased 2.3 percent. Net income increased approximately 8 percent to $6.8 million and diluted net income per share increased 9 percent to $0.24. Investors can take note that that BJ's is also extracting extra sales out of their existing restaurants. BJ's Restaurants will release their fourth quarter and fiscal 2012 results after the market closes on Tuesday, Feb. 19, 2013.

Darden Restaurants is the world's largest full-service restaurant company. They own and operate more than 2,000 restaurants. In December 2012, they affirmed their financial outlook for fiscal 2013.  They anticipate total sales growth of between 7.5 percent and 8.5 percent for the year.

In the first week of February, the National Weather Service Climate Prediction Center noted that year-to-date precipitation (to Feb. 5, 2013) was subnormal in the Far West, central and northern Plains, New England, and along the eastern Gulf and southern Atlantic States. However, surplus precipitation fell on the Four Corners Region, southern Plains, most of the Mississippi, Tennessee, and Ohio Valleys, southern half of the Appalachians, and the mid-Atlantic. There's uncertainty as to how this will all play out for the rest of the year. They further noted that the worst conditions "have stubbornly persisted in the middle third of the Plains, and in central Georgia."

Investors today must consider many variables when performing due diligence on companies. When considering buying stock of food manufacturers and restaurant chains, they must consider that these companies depend on consistent, quality commodity supplies at stable prices.

MichaelONTARIO has no position in any stocks mentioned. The Motley Fool recommends BJ's Restaurants and Chipotle Mexican Grill. The Motley Fool owns shares of BJ's Restaurants, Chipotle Mexican Grill, and Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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